Monthly Economic Letter June 2022
RECENT PRICE MOVEMENT
Movement in benchmark prices was mixed over the past month.
- The July NY/ICE futures fell from 142 cents/lb in May and touched levels as low as 136 cents/lb by the start of June. More recently, July prices rebounded to levels over 145 cents/lb.
- The December NY/ICE futures contract, which reflects price expectations after the 2022/23 harvest, rose around the middle of May and touched values above 130 cents/lb. Later in May, December prices fell below 120 cents/lb before recovering in June.
- The direction of the A Index was erratic over the past month, but the current values are nearly even with those a month ago (164 cents/lb).
- The China Cotton Index (CC 3128B) is lower month-over-month. In international terms, it dropped from 151 to 147 cents/lb. In domestic terms, values fell from 22,300 to 21,300 RMB/ton. The RMB strengthened against the dollar from 6.73 to 6.68 RMB/USD.
- Indian spot prices (Shankar-6 quality) decreased from 164 to 160 cents/lb and from 99,000 to 97,500 INR/candy. The INR consistently traded near 78 INR/USD over the past month.
- Pakistani spot prices fell from 137 to 127 cents/lb between the middle and end of May. Near the start of June, prices bounced as high as 139 cents/lb but later retreated to 126 cents/lb. Domestic prices were comparatively steady between 21,000 and 22,500 PKR/maund. The PKR was volatile and weakened from 188 to 200 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured meaningful changes to 2021/22 production (-1.5 million bales to 116.9 million) and mill-use (-1.3 million bales to 121.7 million) and only slight revisions to 2022/23 forecasts (world production +205,000 bales to 121.3 million, mill-use -450,000 bales to 121.5 million).
The largest country-level changes for 2021/22 production were for India (-1.0 million to 24.5 million) and Brazil (-500,000 to 12.7 million). For 2022/23, the biggest increase was for Egypt (+100,000 bales to 420,000).
In terms of mill-use, the largest changes for 2021/22 were for China (-500,000 bales to 38.0 million), India (-500,000 to 25.5 million), Mexico (-100,000 to 1.9 million), and Vietnam (-100,000 to 7.3 million). For 2022/23, consumption estimates were updated for Bangladesh (-100,000 to 8.9 million), Mexico (-200,000 to 1.9 million), and Vietnam (-100,000 to 7.4 million). It may be notable that all revisions were negative.
Import estimates for 2021/22 were lowered for China (-300,000 to 8.5 million), Pakistan (-200,000 to 4.6 million), and Vietnam (-200,000 to 7.2 million). There were no notable revisions to projections for 2022/23 imports. For 2021/22 exports, the Indian figure was lowered -400,000 bales to 4.3 million. For 2022/23 exports, The Brazilian forecast decreased (-200,000 bales to 9.8 million) and the Mexican forecast increased (+125,000 bales to 400,000).
The July NY/ICE futures contract is nearing expiration. Unless there are significant moves in the next few weeks, there will be a 20 cent/lb decrease in effective Nearby futures when July moves off the board (October is not commonly traded and is generally ignored). Since the December contract is the first to expire after a harvest, it reflects price expectations in a new crop year. Given variability in the weather and the potential for changes in economic conditions, there is always a degree of uncertainty when looking ahead. However, the outlook for 2022/23 is exceptional given the amount of uncertainty from both the supply and demand sides of the market.
From the supply side, it already looks like the U.S. will face a difficult growing season. The West Texas region has been in drought since last year, and while some rain has passed through in recent weeks, it remains dry and there are concerns about abandonment. The last time West Texas suffered widespread abandonment was in 2020/21, when more than half of the acreage planted in the entire state of Texas was not harvested. Nationally, that pulled U.S. production down to only 14.6 million bales.
The U.S. has exported more than 15 million bales in each of the last five crop years. This includes 2019/20, which covered initial COVID lockdowns, and 2020/21, when the harvest was affected by the drought in Texas. On top of exports, U.S. demand includes about 2.5 million bales of domestic mill-use. The only way the U.S. could meet demand in 2020/21 (14.6 million bale crop, 16.4 million bales of exports and 2.6 million bales spun) was through the delivery of warehoused supply that accumulated with the large harvest in 2019/20. U.S. stocks are low going into 2022/23 and cannot be leveraged similarly in the upcoming crop year.
Record prices in India this crop year may give rise to record Indian acreage in 2022/23. The Indian monsoon season has just begun, and it remains to be seen what the weather and potential pest issues might imply for Indian yields and production. Globally, yields could be affected by extraordinarily high input costs. It is unknown what any decreases in applications could mean for output, but reduced treatments could be expected given their cost. This issue is not unique to cotton and could be a factor supporting agricultural prices generally. The war in Europe has contributed to the rise in input costs and reduced the availability of crops like wheat and corn. These crops can compete with cotton for acreage and may lend some support to cotton prices.
All of the above concerns could maintain a floor somewhere underneath the cotton market. Meanwhile, worsening macroeconomic conditions have likely lowered the ceiling above prices.
Inflation is a global issue. With necessities like energy and food costing significantly more, there is less income to devote to clothing and home furnishings. In addition, the monetary policies needed to combat inflation can slow economic growth and can compound the adverse effects of inflation. For the U.S., eight of the past nine periods of rising interest rates were followed by recessions. In five of the last seven U.S. recessions, there were decreases in cotton prices. Supply concerns can support the market, but with cotton prices high by historical standards, a drop in values could be more likely to accompany a potential recession.
A possible signal could be coming from China, which plays an important role in global demand. Chinese prices are nearly always higher than the A Index, but the CC Index fell below the global price in late April. It is currently 14 cents/lb lower. The last time the CC Index fell below the A Index was around the peak of the 2010/11 spike.