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Monthly Economic Letter October 2023

October 16, 2023

Jon Devine

RECENT PRICE MOVEMENT

Cotton benchmarks were flat or lower over the past month.

  • With the latest declines, the NY/ICE December contract has been testing the lower end of the shorter-term range between 85 and 90 cents/lb that has contained values since late August.  Current values are near the middle of the longer-term range for Nearby prices between 78 and 90 cents/lb that has held prices for nearly one year.
  • The A Index recently shifted a little lower alongside NY/ICE futures, with values easing slightly from 98 to 96 cents/lb.
  • Chinese prices (China Cotton Index or CC 3128B) were stable at 113 cents/lb.  In domestic terms, values were also steady, near 18,200 RMB/ton.  The USD/RMB exchange rate was nearly unchanged over the past month, holding around 7.30 RMB/USD.
  • Indian spot prices (Shankar-6 quality) decreased from 95 to 90 cents/lb.  In domestic terms, values fell from 62,000 to 59,000 INR/candy.  The INR was steady against the dollar over the past month, near 83 INR/USD.
  • Pakistani spot prices decreased from 78 to 72 cents/lb between the middle of September and the present.  In domestic terms, prices ranged between 19,000 to 16,600 PKR/maund.  The PKR strengthened from 300 to 280 PKR/USD over the past month.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured a small increase to 2023/24 world production (from 112.4 to 112.6 million) and a small decrease to world mill-use (from 115.9 to 115.8 million bales).  In isolation, these revisions would have resulted in a +300,000 bale addition to 2023/24 ending stocks.

However, the USDA made a major revision to its approach to accounting for Brazilian stocks this month.  As a southern hemisphere producer with multiple regions and multiple harvest periods, the translation of the Brazilian supply to a global crop year based on northern hemisphere production is complex. 

Due to the timing of the Brazilian harvest (June-September), Brazilian supplies approach their annual peak around July 31st, the reference date for estimating ending stocks.  For this reason, much of the Brazilian harvest had been included in the sum for global ending stocks.  Meanwhile, it can take some time for the harvest to be ginned, classed, and made available for export. 

The change to USDA accounting procedures reflects that availability for export, aligning with the notion behind the term “marketing year,” synonymous with crop year, but underlining the period to sell a harvest before the next one comes in behind it.  Under the new procedure, the cotton harvested in Brazil between June and September is now fully counted as supply in the new crop year (e.g., the fiber harvested over the past few months is counted for 2023/24 supply and not split with 2022/23). 

One consequence of this change is that Brazilian ending stocks were lowered by more than 10 million bales month-over-month (from 16.4 million bales in September to 5.8 million in October).  Another consequence of Brazil’s June-July harvest being pulled ahead into 2023/24 is that Brazil is now expected to produce more cotton than the U.S. (the Brazilian export forecast remains slightly lower due in part to higher domestic use in Brazil). 

Other country-level changes to production figures in October included those for the U.S. (-315,000 to 12.8 million), Australia (-300,000 bales to 5.1 million), Greece (-120,000 bales to 1.0 million), and Argentina (+125,000 bales to 1.3 million).

There were no country-level changes for mill-use over 100,000 bales.

The global trade forecast was lowered -44,000 bales (to 43.2 million).  For imports, the only notable change was for Mexico (-150,000 bales to 850,000).  For exports, the largest changes were for Greece (-100,000 bales to 1.0 million), the U.S. (-100,000 bales to 12.2 million), Tanzania (+105,000 to 275,000), and Argentina (+150,000 bales to 700,000).

PRICE OUTLOOK

The International Monetary Fund (IMF) just released an updated set of forecasts for global economic growth.  Relative to the figure released in July, the October projection for 2023 global GDP growth was unchanged (at 3.0%), but the forecast for 2024 was lowered slightly (from 3.0% to 2.9%).  The IMF stated that risks to the outlook have become more balanced, but it also indicated that downside potential appears more likely than the possibility for future upward revisions. 

Recent geopolitical developments highlight the capacity for conditions to evolve rapidly, but the longer-term outlook suggests a lower trajectory than has been enjoyed in recent decades.  Over the next five years, the IMF predicts the average annual rate of global growth GDP to be 3.1%.  For comparison, between 2012 and 2019 (the period after the initial recovery from the financial crisis and ahead of COVID), growth averaged 3.4%.  In the period between 2001 and 2007, global growth averaged 4.4%.

Global economic growth is closely associated with global mill demand. Between the 2001/02 and 2007/08 crop years, the average annual growth rate for world mill-use was 4.4%.  Between the 2012/13 and 2018/19 crop years, the average annual growth rate for cotton mill-use was 2.1%.

 For the past year and a half, global mill demand has not only been affected by concerns regarding slower economic growth, but also by sharp reductions in order placement driven by inflation, higher financing costs, and inventory management throughout supply chains. 

With a smaller global cotton harvest, a question for price direction is how steep an eventual recovery in order placement might be and when it could occur.  The global textile supply chain tends to overcorrect, and a possible example in the current environment comes from the U.S.  In terms of weight volume, U.S. trade data describe a 15-20% reduction in shipments in apparel imports (cotton and all fibers) relative to pre-pandemic volumes.  At the same time, inflation-adjusted figures describing consumer spending on apparel have been stable at levels about 20% higher than before COVID.  Inventories are in the middle, but the divergence between imports and consumer spending suggests a supply deficit of several million bales for the U.S. alone.  If the trajectory of a recovery in orders for the U.S. and other consumer markets is steep and gets underway earlier in 2023/24, supply concerns could pull prices higher.  If the recovery is progressive, the effects on prices could be muted.

The timing of any recovery should matter.  Cotton prices are more attractive relative to competing crops than last year.  If orders resurface after acreage forecasts are released, the market may be reassured by projections for more cotton in 2024/25.  If more moisture comes to West Texas, as could be anticipated with persistent El Nino conditions, the suggestion of an increase in global exportable supply may alleviate upward pressure on prices.