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Monthly Economic Letter January 2024

January 16, 2024

Jon Devine

RECENT PRICE MOVEMENT

Most cotton benchmarks were flat over the past month. Pakistani prices increased.

  • Prices for the NY/ICE March contract continued to trade within the range between 78 and 82 cents/lb that has contained them since early December.  The latest values have migrated towards the higher end of that range and are near 81 cents/lb.
  • The A Index changed little over the past month, holding to values between 90 and 92 cents/lb.
  • Chinese prices (China Cotton Index or CC 3128B) were flat to marginally higher in international terms, rising from 103 to 105 cents/lb.  In domestic terms, values generally traded between 16,200 and 16,600 RMB/ton.  The RMB was mostly stable against the dollar, trading between 7.09 and 7.18 RMB/USD.
  • Indian spot prices (Shankar-6 quality) were steady at levels near 85 cents/lb.  In domestic terms, values ranged between 54,500 and 55,300 INR/candy.  The INR held around 83 INR/USD over the past month.
  • Pakistani spot prices increased from 73 to 82 cents/lb.  In domestic terms, values rose from 17,000 to 19,000 PKR/maund.  The Pakistani rupee strengthened slightly, from 284 to 281 PKR/USD.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured a slight increase to global production (+263,000 bales to 113.2 million) and a decrease to global mill-use (-1.3 million bales to 112.4 million).  Historical changes lifted beginning stocks +381,000 bales to 83.2 million. 

The net effect for 2023/24 ending stocks was a +2.0 million bale increase.  At 82.4 million bales, the current forecast for supply at the end of the current crop year suggests the highest volume of available supply since 2015/16 (since China completed its drawdown of reserves).

The largest changes to country-level production figures included those for the U.S. (-342,000 to 12.4 million bales), Argentina (+200,000 bales to 1.5 million), and China (+500,000 bales to 27.5 million).

The largest change for mill-use included revisions for India (-300,000 bales to 23.7 million), Indonesia (-300,000 bales to 1.9 million), Pakistan (-200,000 bales to 9.8 million), Uzbekistan (-200,000 bales to 3.0 million), and Turkey (-100,000 bales to 7.4 million). 

The global trade projection was lowered -100,000 bales to 43.1 million.  In terms of imports, the largest changes were for Indonesia (-300,000 bales to 2.0 million), Pakistan (-200,000 bales to 3.8 million), and China (+500,000 bales to 11.5 million).  For exports, the largest changes were for India (-200,000 bales to 1.6 million), the U.S. (-100,000 bales to 12.1 million), Australia (+100,000 bales to 5.8 million), and Turkey (+150,000 bales to 1.1 million).

PRICE OUTLOOK

This month’s USDA report reiterated the challenging demand conditions plaguing supply chains since interest rates began to rise.  The USDA’s initial official estimate for 2023/24 mill-use was released in May, and it suggested consumption could be 121.5 million bales.  This would have represented a healthy recovery following the weakness last crop year, when use was only 111.2 million bales.  The USDA’s current figure for 2023/24 is only marginally higher than the one for 2022/23 (113.2 million), the trend in revision has been downward, and there is the potential for further reductions.

That initial (May) figure for 2023/24 was derived with an assumption that the inventory correction process that went into place after the sharp reversal from stimulus-fed-optimism to impending-recession-concern would have stabilized by now and that demand would have resurfaced. 

However, recent industry reports indicate that the recovery has yet to emerge.   One example of an industry report is the industry survey conducted by the International Textile Manufacturers Federation (ITMF).  Since May 2021, the ITMF has been asking mills throughout the supply chain and around the world about business conditions.  In their December 2023 edition, a finding was that new order intake reached a record low (data only go back to the first half of 2021, but coverage is sufficient to indicate that a recovery has not begun).   Weakness in demand was a common feature spread across regions and stages in the manufacturing process (i.e., spinning, fabric, and cut and sew).

With the recovery in demand yet to occur, a lingering question for the market is when and how strong it might be when it surfaces.  Recent macroeconomic data have generally surprised to the upside.  This is particularly true for the U.S., where the recession that was widely feared after the increases in interest rates has not emerged.  Instead, annualized GDP growth in the third quarter was over five percent, holiday spending was healthy, and the consensus view now suggests a soft landing. 

While this may be encouraging, headwinds persist in terms of pricing.  The average cost per square meter equivalent of cotton-dominant clothing imported into the U.S. is still higher than before COVID.  Higher interest rates are not unique to the U.S., and they make financing more expensive throughout supply chains.  Although recession appears less imminent for the U.S., one likely has developed in the euro zone, and global economic growth is predicted to be sluggish for the next several years.  Under the threat of slow macroeconomic conditions, investors have been paying attention to retailer costs, which may contribute to cautious order placement. 

Periods of demand recovery have coincided with sharp increases in cotton prices in the recent past.  For example, the 2010/11 price spike followed the 2008/09 financial crisis and the 2021/22 spike followed COVID lockdowns.   In both recent examples, governments acted to stimulate demand and interest rates were at or near zero.  The current prospect of large-scale fiscal or monetary stimulus appears unlikely, especially if a soft landing is achieved in the U.S. and there is no recession to create an impetus for stimulus.  Without a coordinated effort to stimulate spending across consumer markets, the eventual recovery from the current slow period of demand could be more muted than what was experienced after other recent upturns.