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Monthly Economic Letter March 2024

March 11, 2024

Jon Devine

RECENT PRICE MOVEMENT

All cotton benchmarks increased over the past month.

  • Prices for the NY/ICE May contract broke through resistance around 90 cents/lb in early February, which pulled nearby prices out of the general range between 78 and 90 cents/lb that contained nearby values since November 2022.  After breaking out of the longer-term range, trading has been volatile, with prices registering both limit up and limit down intraday moves.  Closing prices for the May contract climbed as high as 102 cents/lb (on February 28th).  Current prices are near 95 cents/lb.
  • There were notable developments involving other NY/ICE futures contracts.  Prices for the July contract followed a pattern similar to May, but movement in the December contract was muted by comparison.  Values for the December futures contract reflect price expectations after the 2024/25 northern hemisphere harvest is underway.  Prices for December futures only fluctuated between 82 and 85 cents/lb over the past month.  With the gains in prices for July, the separation between 2023/24 and 2024/25 prices stretched as wide as 15 cents/lb (on February 28th) and remains more than 10 cents/lb.
  • The A Index increased from 96 to 102 cents/lb between early February and the present.  Over the past month, it marked a peak of 107 cents/lb (on February 29th). 
  • Chinese prices (China Cotton Index or CC 3128B) moved marginally higher in international terms, from 107 to 108 cents/lb.  In domestic terms, values generally traded between 17,000 and 17,200 RMB/ton.  The RMB was mostly stable against the dollar, trading near 7.19 RMB/USD.
  • Indian spot prices (Shankar-6 quality) climbed from 85 to 95 cents/lb.  In domestic terms, values ranged between 55,700 and 61,500 INR/candy.  The INR was steady near 83 INR/USD.
  • Pakistani spot prices increased from 89 to 94 cents/lb.  In domestic terms, values rose from 20,500 to 21,500 PKR/maund.  The Pakistani rupee held near 279 PKR/USD.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured small increases to global production (+131,000 to 113.0 million bales) and mill-use in 2023/24 (+483,000 bales to 112.9 million).  There were no revisions to previous crop years, so the beginning stock level was unchanged.  The net result of this month’s revisions was a -353,000 bale decrease to world ending stocks (to 83.3 million).

At the country-level, the largest changes were for the U.S. (-334,000 bales to 12.1 million), Argentina (-100,000 bales to 1.6 million), and India (-500,000 bales to 25.5 million).  For mill-use, the largest changes were for Turkey (-200,000 bales to 7.0 million), India (+300,000 bales to 24.0 million), and China (+500,000 bales to 37.5 million). 

The global trade forecast was lifted 355,000 bales to 43.2 million.  For imports, the largest changes were for Pakistan (-200,000 bales to 3.4 million), Turkey (-200,000 bales to 3.8 million), and China (+900,000 bales to 12.9 million).  For exports, the largest changes were for Argentina (-100,000 bales to 600,000), Azerbaijan (-100,000 bales to 400,000), Australia (+100,000 to 5.8 million), Turkey (+100,000 bales to 1.3 million), and India (+400,000 bales to 2.0 million).

PRICE OUTLOOK

The surge in cotton prices coincided with an increase in participation in the futures market.  Open interest represents the number of actively traded contracts, and it rose +33% between mid-January and the present.  Current levels of open interest are the highest of the crop year but are only marginally higher than the level recorded in early October. 

The increase in open interest signals a flow of investment into cotton futures.  Data from the Commodity and Futures Trading Commission (CFTC) describe the volume of positions held by different types of market participants (i.e., physical traders, speculators, and index funds).  In those data, the speculator position shifted from several thousand contracts net short (indicating that they were collectively betting that prices would decrease) to more than 80,000 contracts net long (betting that prices would increase) between the middle of January and the present.  Over the same period, values for the May futures contract increased from values less than 85 cents to levels of 95 cents/lb or higher.

On the physical side of the cotton market, there are competing views.  On one hand, there is tightness in available exportable supply.  On the other hand, there has been a sluggish demand environment that may not be helped by more expensive and highly volatile fiber prices.

The 2023/24 U.S. crop is forecast to be the smallest in at least fourteen years (near the level in 2009/10).  The U.S. is the world’s largest cotton exporter, so this alone can raise some concern about global exportable supply.  This crop year, those concerns would have been compounded by the aggressive buying by China.  Year-over-year, U.S. commitment to China is up +84% or +1.9 million bales, despite a harvest that is down -2.3 million bales compared to last crop year.  China’s appetite for imports in 2023/24 has extended beyond the U.S. and has included strong buying from Brazil and Australia.  Exports from Brazil to China are up +121% or +2.2 million bales year-over-year so far this crop year (August-January).  Exports from Australia to China are up +781%  or +0.9 million bales over the same time period (political differences had been constraining Chinese buying from Australia in recent years, contributing to the large percentage change). The strength of Chinese demand has been associated with buying from the Chinese reserve system.  After selling more than four million bales in auctions held between July and November, officials appear to be replenishing supply through imports.  The volume of imports already registered from the U.S., Brazil, and Australia easily surpasses the four million bales sold, and government-related buying from China appears to have already tapered off. 

Additionally, it should be noted that Chinese prices have not increased in tandem with external prices.  If imported cotton prices do not make financial sense, Chinese buying can be expected to slow.  In both the 2010/11 and 2021/22 price spikes, the collapse in international prices came not long after the A Index crossed the CC Index.  A Index prices have not surpassed the CC Index after the latest surge, but recent values have been close (current A Index is 105 cents/lb, the CC Index is 108 cents/lb).

Outside of China, an inverse environment has persisted in terms of import demand.  U.S. commitment to the world outside of China is down -23% year-over-year (-1.9 million bales).  Brazilian exports to the world outside China are down -26% or -0.8 million bales so far this crop year (August-January), and Australian shipments are down -30% or -1.0 million bales over the same period. 

Without a dominant government-related feature like China’s reserve system outside of China, the trade environment for the world-less-China could be considered more reflective of global spinning demand.  Many of the world’s spinning mills suffered financially with the sharp drop in prices in 2022, which was made worse by the sluggishness in downstream demand that followed increases in interest rates and their dampening effect on global economic growth.

The contradictory influences of tightness in available exportable supply and weakness in mill demand may continue to push and pull prices through the end of the current crop year.  Looking ahead to 2024/25, a consequence of the recent rally could be additional cotton acres.  Especially if improved moisture levels hold in West Texas, the corresponding increase in production could limit upward pressure on 2024/25 prices.