Monthly Economic Letter January 2021
RECENT PRICE MOVEMENT
Global cotton prices continued to rise over the past month.
- The NY March futures contract climbed from 74 cents/lb to 82 cents/lb. The December futures contract, reflective of price expectations after the 2021/22 harvest, rose from 72 to 77 cents/lb.
- Cotlook’s A Index rose from 80 to 86 cents/lb.
- In international terms, the China Cotton Index (CC Index 3128B) increased from 102 to 108 cents/lb. In domestic terms, values climbed from 14,700 to 15,300 RMB/ton. The RMB strengthened against the USD, from 6.55 to 6.47 RMB/USD.
- Indian cotton prices (Shankar-6 quality) increased from 71 to 75 cents/lb. In domestic terms, values increased from 40,700 to 43,200 INR/candy. The Indian rupee was steady against the USD near 73 INR/USD.
- In international terms, Pakistani prices rose from 72 to 80 cents/lb. In domestic terms, prices increased from 9,500 to 10,500 PKR/maund. The Pakistani rupee was steady against the USD near 160 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured a decrease to global production (-1.0 million bales to 112.9 million) and a slight increase to global mill-use (+100,000 bales to 115.7 million). A series of minor revisions to 2019/20 estimates resulted in a small decrease to 2020/21 beginning stocks (-143,000 bales to 99.3 million). A net effect was a 1.2 million bale reduction to the forecast for 2020/21 ending stocks (to 96.3 million).
At the country-level, there was a broad range of changes to production numbers. The largest update was for the U.S., where the harvest estimate was lowered 1.0 million bales. This was the second consecutive substantial decrease to the projection for U.S. output (there was a 1.2 million reduction last month). The current forecast of 15.0 million bales suggests a 5.0 million bale year-over-year decrease for the U.S. crop.
Other notable revisions for production were made to Greece (+150,000 bales to 1.4 million), Australia (+100,000 bales to 2.5 million), Turkey (+100,000 bales to 2.9 million), Mali (-115,000 bales to 0.3 million), and Pakistan (-200,000 bales to 4.3 million). The current forecast for Pakistan is about half the volume harvested on average in recent years (production was lower last crop year too, average from 2014/15 to 2018/19 was 8.2 million bales).
For mill-use, the largest changes were for China (+500,000 bales to 38.5 million), Turkey (+200,000 bales to 7.2 million), the U.S. (-100,000 bales to 2.4 million), Vietnam (-100,000 bales to 6.7 million), and Indonesia (-200,000 bales to 2.7 million).
The global trade forecast was increased 380,000 bales to 43.6 million. In terms of imports, the largest changes were for China (+500,000 bales to 10.5 million), Pakistan (+200,000 bales to 4.9 million), Mexico (+100,000 bales to 0.8 million), Turkey (+100,000 bales to 4.5 million), Vietnam (-100,000 bales to 6.7 million), and Indonesia (-200,000 bales to 2.6 million). In terms of exports, the largest changes were for the U.S. (+250,000 bales to 15.3 million), Australia (+100,000 bales to 1.5 million), Mexico (+100,000 bales to 0.3 million), and Mali (-150,000 bales to 0.6 million).
Recent USDA revisions may have reduced the divergence between prices and ending stock estimates somewhat, but a wedge remains.
Since August, USDA forecasts for 2020/21 global ending stocks have fallen from 104.9 million bales to 96.3 million. Nonetheless, the latest USDA report predicts the fourth-highest volume of ending stocks on record. The current consumption forecast calls for a level of use about five million bales lower than before the pandemic (120.2 million bales in 2018/19, 115.7 million bales in 2020/21).
High stocks and lower use imply elevated values for the stocks-to-use ratio, and the current figure (83.2%) ranks among the fourth highest in recent decades. In the mid-2000s, global stocks-to-use ratios near 50% were considered elevated. Between 2004/05 and 2006/07, when world stocks-to-use averaged 53.2%, the NY Nearby averaged 51.2 cents/lb (68.9 cents/lb adjusted to current USD assuming 2% inflation per year). The current value for the NY Nearby is 82 cents/lb, and the current stock-to-use ratio is 83.2%.
There have been important shifts in the market over that time, such as the increase in production in Brazil. Ending stocks are defined as the volume available at the end of July. Due to the timing of the Brazilian harvest (southern hemisphere), nearly all Brazilian production is counted as ending stocks. Following the 2010/11 price spike, the USDA made a series of upward revisions to estimates for Indian stocks. The preservation of those adjustments has led to questions of over-estimation of Indian stocks for several years.
After compensating for the six million bale increase in Brazilian production over the past 15 years and allowing that Indian stocks could be lowered by a similar magnitude, global stock estimates would result in a stocks-to-use ratio of 72.8% (current ending stock estimate of 96.3 – 12.0 = 84.3 million bales, 84.3 / 115.7 million bales of mill-use = 72.8%). Between 2016/17 and 2018/19, global stocks-to-use was below 70.0% (between 66.0% and 69.1% in those three crop years). During this time, crop year averages for NY Nearby ranged from 72.9 to 74.4 cents/lb.
Lower stocks-to-use and lower prices in these recent years underline how prices may have increased beyond levels explainable by current supply and demand estimates. It is possible that further revisions to supply and demand estimates are necessary. It is also possible that prices may be susceptible to downward correction.
Regardless, recent increases in cotton prices can be expected to influence planting decisions for the upcoming 2021/22 crop year. A recent survey of U.S. growers conducted by a trade publication suggested that U.S. acreage could decrease about 5% next crop year. Ratios of futures prices suggest plantings will be nearly flat. At their annual meeting (Feb 12-14), the National Cotton Council will release results from their survey of U.S. growers’ planting intentions. At their outlook forum (Feb 18-19), the USDA will release preliminary estimates for global supply and demand in 2021/22.