Monthly Economic Letter October 2021
RECENT PRICE MOVEMENT
Most benchmark prices surged between late September and the present.
- After touching values below 90 cents/lb on September 20, the December NY/ICE futures contract surged higher. Prices moved lower with the latest USDA report, but current levels remain above one dollar.
- After trading near 103 cents/lb for much of September, the A Index dipped below 100 cents/lb on September 21. Since then, it climbed to levels as high as 120 cents/lb.
- The Chinese Cotton Index (CC Index 3128B) did not decrease like NY/ICE futures or the A Index in late September, but values moved sharply higher in recent trading nonetheless. Since late September, the CC Index increased from 128 to 153 cents/lb. In domestic terms, prices increased from 18,100 to 21,700 RMB/ton. The RMB was relatively stable against the dollar over the past month, holding near 6.46 RMB/USD.
- Indian spot prices (Shankar-6 quality) were comparatively stable. Increases since late September were from 95 to 99 cents/lb. In domestic terms, values increase from 54,500 to 58,400 INR/candy. The INR weakened slightly against the dollar, from 73 to 75 INR/USD over the past month.
- Volatility in Pakistani spot prices resembled that in other markets outside India. In international terms, values fell from over a dollar in early September to as low as 91 cents/lb late in the month. More recently, prices have been as high as 105 cents/lb. In domestic terms, prices increased from 12,700 to 14,400 PKR/maund. The PKR weakened slightly against the dollar over the past month, from 168 to 170 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured an increase to the forecast for global cotton production (+695,000 to 120.3 million) and a decrease for global mill-use (-734,000 bales to 123.4 million). A series of revisions to historical Indian statistics drove a 1.0 million bale decrease to 2021/22 beginning stocks (to 90.3 million bales).
A net result of revisions to production, consumption, and beginning stocks was a +446,000 bale addition to the projection for 2021/22 ending stocks (to 87.1 million bales). This figure suggests that world stocks will finish the current crop year at a level that ranks as the 7th highest on record. The current estimate for world-less-China ending stocks ranks as the 3rd highest on record.
At the country-level, the largest changes included those for the U.S. (-505,000 bales to 18.0 million), India (-500,000 bales to 28.0 million), Turkey (+200,000 bales to 3.6 million), and Pakistan (+1.5 million to 6.5 million).
For mill-use, the largest changes included those for China (-1.0 million bales to 40.0 million), Vietnam (-200,000 bales to 7.3 million), Turkey (+100,000 bales to 8.4 million), and Pakistan (+200,000 bales to 11.2 million).
The global trade estimate was lowered from 46.8 to 46.4 million bales. In terms of imports, the largest changes were for Pakistan (-900,000 bales to 5.0 million), Vietnam (-200,000 bales to 7.3 million), Iran (+100,000 bales to 350,000), Mexico (+100,000 bales to 1.0 million), and China (+500,000 bales to 10.5 million). In terms of exports, the largest changes were for Brazil (-200,000 bales to 8.0 million) and India (-200,000 bales to 5.8 million).
Cotton prices began their latest surge by bouncing off levels near 89 cents/lb on September 20. Rising market lows define upward trend lines. The dip down to 89 cents/lb pulled values down to the trend line maintained by the NY/ICE Nearby since April 2020. When prices did not break below the line, it served as a reconfirmation of the upward trend. The reconfirmation of the trend may have attracted attention from speculators. That attention was likely enhanced by the momentum of price increases that occurred since then.
Commitment of Traders data published by the Commodity Futures Trading Commission (CFTC, the government agency that oversees U.S. futures markets) describe participation in cotton futures by participant type. One type is speculators. These data show a 48% increase in net long speculative positions between September 21 and October 5 (data are published weekly with a lag, long positions are bets prices will rise).
While the patterns in price movement could have pulled investors into the cotton market, recent demand data may have also been attractive. Notably, there has been evidence of strong demand from China. Auctions from government reserves in China surpassed the initial target of 600,000 tons scheduled for release between early July and the end of September (total volume sold came out near 630,000 tons or 2.9 million bales). Due to the strength of demand, auctions were extended through the end of November.
After a period of drawdown (2014/15-2017/18), a stated objective of the Chinese reserve system has been the rotation of stocks. An implication is relative stability in reserve volumes. This suggests that the Chinese government will make purchases to replenish cotton sold at auction. In weekly U.S. export sales data, China bought 1.3 million bales in reports issued in September. In addition, the Chinese government recently announced the release of additional sliding-scale import quota that Chinese mills can use. Cotton already held in storage at ports as consignment stocks can be leveraged against this quota and reduce the pull for new shipments from other countries.
It remains to be seen how high and how long the current surge in cotton prices will last. The recent rally does not appear supported by market fundamentals. This suggests it is unlikely that the rally can be maintained long enough to produce prices anywhere near the levels experienced around the peak during the 2010/11 crop year.
This time is different because the world is not facing scarcity. Even after recent sales, China is estimated to be holding five to six times the volume of cotton in reserves than it had in early 2010/11. Private Chinese stocks are estimated to currently be about three times higher than in early 2010/11, and stocks in the world-less-China are forecast to be at their third-highest volume on record at the end of 2021/22.
Monthly Economic Letter