We have updated our Terms and Conditions and Privacy Policy with important information about our collection and use of your data and your data privacy options.

Monthly Economic Letter December 2023

December 12, 2023

Jon Devine

RECENT PRICE MOVEMENT

Cotton benchmarks were flat or slightly lower over the past month.

  • Prices for the NY/ICE March contract tested both sides of their shorter-term range between 78 and 82 cents/lb over the past month.  With a limit-up move on December 7th, prices breached the upper end of that range, but they dropped back into it the next trading day.  Current values are near 81 cents/lb.
  • The A Index was below 90 cents/lb most of the past month, but with the surge in NY/ICE futures on December 7th, it climbed to 92 cents/lb the following day (latest available price point for December 8th).
  • Chinese prices (China Cotton Index or CC 3128B) eased from 106 to 103 cents/lb.  In domestic terms, values dropped from 17,000 to 16,200 RMB/ton.  The RMB strengthened against the dollar, from 7.29 to 7.15 RMB/USD.
  • Indian spot prices (Shankar-6 quality) slipped from 87 to 85 cents/lb.  In domestic terms, values fell from 56,700 to 55,200 INR/candy.  The INR was steady near 83 INR/USD over the past month.

Pakistani spot prices decreased slightly from 75 to 73 cents/lb.  In domestic terms, values fell from 17,500 to 17,000 PKR/maund.  The Pakistani rupee held near 284 PKR/USD.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured reductions to estimates for world production (-542,000 bales to 112.9 million) and mill-use (-1.6 million bales to 113.7 million) in 2023/24.  Revisions to figures for previous crop years lowered 2023/24 beginning stocks -205,000 bales to 82.8 million. 

The net result for the projection for global ending stocks was a +900,000 bale addition, which brought the forecast for warehoused supply at the end of the 2023/24 crop year to 82.4 million bales, which is a healthy volume by historical standards.

Notable country-level revisions for production included those for Pakistan (+200,000 bales to 6.7 million), Mexico (-125,000 bales to 925,000), Turkey (-300,000 bales to 3.2 million), and the U.S. (-310,000 bales to 12.8 million).

Country-level revisions for mill-use were primarily negative.  The largest decreases were for China (-1.0 million bales to 36.5 million), Turkey (-400,000 bales to 7.5 million), and the U.S. (-150,000 bales to 1.9 million). The figure for Bangladeshi consumption increased +100,000 bales to 7.8 million.

The global trade estimate decreased -150,000 bales to 43.2 million.  For imports, the largest country-level changes were for China (+500,000 bales to 11.0 million), Bangladesh (-200,000 bales to 7.5 million), Pakistan (-200,000 bales to 4.0 million), and Turkey (-200,000 bales to 4.1 million).  For exports, the largest revisions were for Turkey (+250,000 to 900,000) and Brazil (-300,000 bales to 11.5 million).

PRICE OUTLOOK

The updates in this month’s USDA report reflected reports of persistently sluggish demand throughout supply chains.  The latest revisions narrowed the projected global production deficit to only 811,000 bales (112.9 million bales of production and 113.7 million bales of mill-use).  This gap is significantly smaller than the differences forecast in September and October, when the global production shortfall was expected to be wider than three million bales (3.5 million bale deficit predicted in September and 3.2 million bale deficit predicted in October).

While it is important to pay attention to imbalances between incoming supply and demand, the size of the discrepancy a few months ago was still small relative to crop years when the harvest and mill demand were significantly misaligned.  Since 2009/10 (15 crop years ago), there have been six crop years when the separation between production and consumption has been greater than ten million bales, and the average of absolute values during this timeframe was just over ten million bales.  As a result, even the larger shortfalls that were projected a few months ago should have only been interpreted as a relatively mild signal for prices.  Nonetheless, the fading size of the expected deficit represents the weakening of a potential argument that may have existed for stronger fiber prices.

Beyond the narrowing of the global production gap, a potentially more relevant implication for price direction may be the lingering questions about demand. 

In May, the USDA releases its first official set of estimates. Since then, expectations for global mill-use have fallen from 121.5 million bales to 113.7 million bales (-7.8 million bales May-December).  Given that consumption has recently been as high as 124.2 million bales (2020/21), global spinning capacity is well above 120 million bales. A recovery following inventory drawdowns could have supported consumption at the initially predicted level.  However, that recovery has yet to surface, and industry reports continue to describe slow downstream demand and challenging spinning margins. Until the corner is turned and a bottom is formed, further reductions in consumption forecasts could be coming.

Meanwhile, decreases in global cotton production have prevented a surplus of global production relative to use from emerging.  Since the initial USDA forecasts in May, the world cotton harvest has shrunk from 119.4 to 113.5 million bales (-5.9 million bales May-December).  With demand sluggish, the smaller global crop has likely prevented greater decreases in cotton prices. 

The cotton market has not been the only agricultural market to experience losses.  Relative to one year ago, new crop prices for cotton are down 6% (new crop prices are futures that expire after an upcoming harvest; current new crop cotton prices are for the December 2024 NY/ICE contract).  Parallel prices for corn are down by greater margins and suggest cotton is more attractive relative to these competing crops than one year ago.  This suggests cotton should be able to maintain or increase acreage next crop year. When paired with potential improvement in growing conditions in places like West Texas (the arrival of El Nino suggests more moisture), the world could experience a boost in production in 2024/25. 

A recovery in demand could be anticipated to have arrived at some point between now and the end of the 2024/25 crop year. But, if both incoming supply and demand are moving in the same direction next crop year, there could be continued balance in production, use, and stocks that could support stability in prices.