Monthly Economic Letter February 2020
RECENT PRICE MOVEMENT
Most benchmark prices decreased over the past month.
- The nearby March NY futures contract fell from 71 to 68 cents/lb. Open interest is migrating out of March and into the May contract. Values for May futures also decreased and commonly traded at levels a little less than one cent higher than March futures. Prices for the December contract, which are a reflection of expectations after the 2020/21 harvest, traded slightly higher than values for both March and May and are currently just below 70 cents/lb.
- The A Index declined from 79 to 77 cents/lb.
- In international terms, the China Cotton Index (CC Index 3128B) decreased from 91 to 87 cents/lb. In domestic terms, prices eased from 13,800 to 13,400 RMB/ton. The RMB weakened slightly against the dollar over the past month, from 6.93 to 6.98 RMB/USD.
- Indian cotton prices (Shankar-6 quality) slipped from 73 to 71 cents/lb. In domestic terms, values fell from 40,500 to 39,400 INR/candy. The Indian rupee was stable near 71 INR/USD.
- Pakistani prices were stable near 71 cents/lb in international terms. In domestic terms, values held close to 9,000 PKR/maund. The Pakistani rupee was also steady, consistently trading near 155 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured an increase to the forecast for world production in 2019/20 (+850,000 bales to 121.3 million) and a decrease to the forecast for 2019/20 world mill-use (-1.2 million bales to 119.0 million). An upward revision to last crop year’s production (+454,000 to 118,603 million), lifted the estimate for 2019/20 beginning stocks. In combination, the increase in beginning stocks, the increase in production, and the decrease in consumption resulted in a 2.5 million bale increase to the projection for 2019/20 ending stocks (82.1 million bales). This figure is slightly above levels maintained since 2016/17 (between 80.0 and 80.8 million bales).
The largest country-level revisions to production figures included those for Pakistan (+500,000 bales to 6.6 million), Brazil (+200,000 to 12.7 million), and Tanzania (+100,00 to 500,000).
For mill-use, the largest updates were for China (-1.0 million bales to 37.5 million), Vietnam (-300,000 to 6.8 million), Pakistan (+200,000 to 10.8 million), and Turkey (+100,000 to 7.2 million).
The global trade forecast was lowered 285,000 bales to 43.5 million. In terms of imports, the biggest changes were for Vietnam (-300,000 bales to 6.8 million), Pakistan (-100,000 to 4.2 million), South Korea (-100,000 to 600,000), India (+100,000 to 2.3 million), and Malaysia (+250,000 to 1.0 million).
For exports, notable revisions were for India (-200,000 to 3.6 million), Malaysia (-100,000 to 450,000), and Brazil (+100,000 to 8.9 million).
The 2020 calendar year has already been full of developments affecting both the cotton market and the global macroeconomic environment. Trade tensions began to stabilize in late 2019. A little less than one month ago, the U.S. and China signed the Phase One deal solidifying some progress towards a possible greater agreement. The expectation that the trade dispute will continue to trend away from escalation was an important assumption in recent global economic forecasts that call for improved global growth in 2020. In figures released in late January, the International Monetary Fund (IMF) predicted world GDP growth would accelerate from 2.9% in 2019 to 3.3% in 2020. Global economic growth is closely associated with cotton consumption growth, and the forecast suggested an acceleration in mill-use.
However, those figures were developed before the coronavirus outbreak. Much remains unknown about how long the epidemic might last. If concerns soon fade, there could be a surge in demand as delayed orders are pushed to fulfillment and Chinese consumers release pent up spending. If the outbreak lingers, delayed orders may be canceled and purchases Chinese consumers could forego purchases they would have made.
The epidemic adds to existing uncertainty on the demand side of the balance sheet stemming from the trade dispute. The Phase One deal suggests China will ramp up its purchases of U.S. cotton. In the first full week of export sales data after the signing of the deal, there was a burst of purchases from China (over 100,000 bales of U.S. sales to China for the first time since February 2018 in week ending January 23rd). However, in the week that followed, U.S. sales to China were significantly weaker. It remains unknown when and if a surge in Chinese purchases might occur.
Downstream in the supply chain, the U.S. is scheduled to halve tariff penalties (from 15 to 7.5 percentage points) applied to imports of most categories of Chinese-made apparel and home textiles on February 14th. These tariffs have been in effect since September. In trade data published since then, it has become clear that competing countries have not been able to offset the decreases from China, and there has been a net loss in demand. U.S. cotton-dominant apparel imports were down 9% year-over-year in September-December from all sourcing locations (the decline from China was 28%, data in terms of square-meter equivalence). The reduction in tariffs next month may reduce the declines in retailer orders, but it may be optimistic to expect a sudden return to year-over-year growth in shipments.
There are also questions from the supply side. A perennial source of uncertainty this time of year relates to planting for the next crop year. The rise in cotton prices from the lows reached in August and September (NY futures traded below 60 cents/lb and are currently near 70 cents/lb) has diminished the probability of a sharp reduction in acreage, but a slight reduction in U.S. and global plantings could still be expected.
The National Cotton Council will release the results of its survey of U.S. growers’ planting intentions at their annual meeting on February 15th. The USDA will release preliminary figures for global production, mill-use, and trade at their Outlook Forum on February 21st. These early estimates will provide some clarity for the outlook, but the rapidity of recent developments around the world highlight how quickly influential events can emerge.