Monthly Economic Letter January 2022
RECENT PRICE MOVEMENT
All benchmark prices increased over the past month.
- The March NY/ICE futures fell as low as 104 cents/lb in early December. After trading sideways in the first half of that month, values rose in the second half of December. Current prices are over 116 cents/lb and are even with the highs for the contract registered in mid-November.
- The December 2022 NY/ICE contract, which reflects price expectations after the next harvest (2022/23 crop year), has been able to break through resistance around 92 cents/lb and has marked new life of contract highs. Current values for the December contract are over 95 cents/lb.
- The A Index increased from 119 to 129 cents/lb. Current values are the highest reached during the 2021/22 surge in prices.
- The China Cotton Index (CC 3128B) increased, but the change was smaller than for NY/ICE futures or the A Index. In international terms, the CC Index rose from 157 and 160 cents/lb. In domestic terms, values climbed from 21,950 to 22,500 RMB/ton. The RMB was steady against the dollar over the past month, near 6.37 RMB/USD.
- Indian spot prices (Shankar-6 quality) surged from 109 to 126 cents/lb or from 64,900 to 72,700 INR/candy. Over the past month, the INR strengthened against the dollar, from 76 to 74 INR/USD.
- Pakistani spot prices climbed from 114 to 127 cents/lb. In domestic terms, prices climbed from 16,700 to 18,300 PKR/maund. The PKR traded between 176 and 178 PKR/USD over the past month.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured slight decreases to world production (-608,000 bales to 121.0 million) and mill-use (-30,000 bales to 124.2 million bales). Revisions to historical estimates lowered 2021/22 beginning stocks -163,000 bales (to 88.4 million). The net result for 2021/22 ending stocks was a -726,000 bale decrease (to 85.0 million).
At the country-level, the largest changes for harvest expectations included those for the U.S. (-660,000 bales to 17.6 million), India (-500,000 bales to 27.5 million), Pakistan (+100,000 bales to 5.8 million), Australia (+200,000 bales to 5.5 million), and China (+250,000 bales to 27.0 million).
For mill-use, the largest country-level changes were for China (-500,000 bales to 39.5 million), Mexico (+100,000 bales to 1.9 million), Pakistan (+100,000 bales to 11.2 million), and India (+200,000 bales to 26.0 million).
The global trade forecast was lowered -380,000 bales to 46.6 million. In terms of imports, the largest changes included those for China (-500,000 bales to 9.8 million), Malaysia (-100,000 bales to 0.7 million), and Pakistan (+200,000 bales to 5.5 million). In terms of exports, the largest changes included those for the U.S. (-500,000 bales to 15.0 million), Burkina Faso (-100,000 bales to 0.9 million), and Australia (+100,000 bales to 4.0 million).
The shipping crisis has been a new obstacle for the market to consider. The inability to reliably deliver fiber to mills within timeframes established in recent decades has likely distorted traditional relationships between stocks and prices. If the fiber physically exists but cannot be delivered on an accurate schedule, it creates a form of scarcity. Over time, challenges associated with delivery could be digested as mills and merchants position inventory to mitigate delays. In the near term, however, the scramble to move supply could contribute to volatility.
Logistical constraints have been a factor inhibiting shipments out of the U.S. Weekly shipment data from the USDA indicate that U.S. exports this far into the crop year are 46% behind the level from one year ago (August 1 through December 30). U.S. shipments to China are 70% lower than one year ago. The size of these year-over-year declines may cause the USDA to make further reductions to its forecast for U.S. exports.
In normal times, additions to U.S. stocks that correspond with decreases in exports could put downward pressure on prices. However, the market is not in a normal situation. If the U.S. builds stocks because of delivery-driven challenges, the market signal is more aligned with a scarcity of available supply than with surplus. Over time, such an interpretation could evolve as strategic adjustments are made to address logistical problems. In the meantime, if supply has trouble meeting demand, it could support prices.
As the world looks forward to the 2022/23 crop year, shipping issues represent just one of a series of important questions for the market. COVID continues to be a threat on the demand front, with the latest variant causing a fresh series of restrictions on consumer activity across the globe. In addition, central banks in both U.S. and the E.U. have announced plans to withdraw stimulus. Reactions to the virus and efforts to combat inflation can slow economic growth, and forecasts for global GDP have been revised lower.
From the production side, the first major question for 2022/23 relates to planted acreage. High cotton prices unambiguously suggest an increase in plantings, but the volume and quality of additional acreage are uncertain. Input costs, notably those for fertilizer, have risen sharply in recent months. The weather is always unknown until it is experienced. There is time for moisture levels to change, but much of the U.S. cotton belt, including all of West Texas, is currently experiencing a level of drought.
Early estimates for 2022/23 will be released over the next couple months. The National Cotton Council will publish results from their survey of U.S. growers’ planting intentions at their annual meeting held February 11-13th. The USDA will release a partial set of global supply, demand, and trade forecasts at their Annual Outlook Forum held February 24-25th.