RECENT PRICE MOVEMENT

Most cotton benchmarks were relatively unchanged over the past month.

• Trading activity has shifted from the December NY/ICE contract to March. Prices for the March NY/ICE contract have been volatile, routinely changing two percent or more on a daily basis.  However, values were rangebound over the past month, moving higher and lower within a band between 80 and 87 cents/lb.  In early November, values were at the upper end of the range.  More recently, values shifted towards the lower end and have traded near 82 cents/lb.
• The A Index followed the pattern of movement in NY/ICE futures and was also rangebound, with values shifting between 98 and 105 cents/lb.
• Chinese prices represented by the China Cotton Index (CC 3128B) were steady around 96 cents/lb. In terms of RMB/ton, values slipped from 15,400 to 14,900.  The RMB strengthened against the USD over the past month, from 7.30 to 6.98.
• Indian spot prices (Shankar-6 quality) moved higher and lower between early November and early December but ended the period at the same value that it began (103 cents/lb). In terms of INR/candy, values traded between 66,000 and 69,000.  The INR was steady near 82 INR/USD over the past month.
• Pakistani prices moved a little lower, falling from 92 to 90 cents/lb over the past month. In domestic terms, prices traded between 16,700 and 16,500 PKR/maund.  The PKR held near 223 PKR/USD over the past month.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured a small -701,000 bale decrease to global cotton production (to 115.7 million) and a considerable -3.3 million bale reduction to global mill-use (to 111.7 million bales).  Historical revisions lowered beginning stocks slightly (-196,000 bale to 85.4 million).  The net result was a +2.3 million bale increase to global ending stocks (to 89.6 million bales).  If realized, this would be the highest volume of stocks since 2019/20, the crop year that coincided with the initial spread of COVID-19.

At the country-level, the largest changes included decreases for Pakistan (-800,000 bales to 3.7 million), Australia (-500,000 bales 5.0 to million), and Mali (-120,000 bales to 1.1 million).  These were partially offset by increases for Turkey (+500,000 bales to 4.9 million) and the U.S. (+211,000 bales to 14.2 million).

The largest revisions to mill-use estimates included those for China         (-1.0 million bales to 35.5 million), India (-1.0 million to 23.0 million), Pakistan (-700,000 bales to 9.0 million), Turkey (-300,000 bales to 8.0 million), Vietnam (-200,000 bales to 6.5 million), and the U.S. (-100,000 bales to 2.2 million).

The global trade forecast was lowered -950,000 bales to 42.7 million.  For imports, the biggest updates were for China (-500,000 bales to 8.0 million), Turkey (-400,000 bales to 4.3 million), and Vietnam (-200,000 bales to 6.6 million).  For exports, the biggest updates were for Australia (-300,000 bales to 5.9 million), the U.S. (-250,000 bales 12.3 million), Mali (-200,000 bales to 1.0 million), Malaysia (-150,000 bales to 50,000), Brazil (-100,000 bales to 8.3 million), and India (-100,000 bales to 3.4 million).

PRICE OUTLOOK

Given widespread reports of a slowdown in mill demand, the decrease to USDA consumption this month could have been anticipated.

China is central to global cotton demand, and the continued inversion of traditional relationships between Chinese prices and other benchmarks may signal that a global recovery in demand is not yet underway.  The CC Index traded below the A Index every day over the past month.  Traditionally, the CC Index is 15-20 cents/lb higher than the A Index.  Since the A Index reflects international export offers, lower Chinese prices indicate little price incentive for Chinese mills to import.  Since China has been the world’s largest importer of cotton in recent decades, this creates a drag on global fiber demand.

In addition to being the world’s largest fiber importer, China is also the world’s largest yarn importer.  Fiber is the biggest cost element for yarn production, so lower Chinese prices also drag Chinese yarn import demand.  This affects fiber demand from other countries that traditionally export yarn to China.

Crop year-to-date (Aug-Oct), Chinese cotton yarn imports are down -58%, representing a decrease of -1.3 million bales.  If annualized for the entire crop year, this would represent a decrease of more than five million bales of demand.

Another barometer for fiber demand is weekly U.S. export sales data.  In those figures, China has been quiet.  China started the crop year with 1.7 million bales of commitment, and in the 18 weeks since the beginning of 2022/23, it has only grown to 1.9 million bales.  Year-over-year, commitment to China is down -39% or -1.2 million bales.

U.S. sales to other markets have also been slow.  Among the top ten destinations for U.S. exports in 2021/22, commitment is up for Pakistan and Bangladesh, flat for Mexico, but down more than 10% for all other markets.

Beyond inflation, rising interest rates, and slower global economic growth, inventory accumulation has also been a challenge for demand.  This is particularly true in the U.S., where there were record apparel imports this calendar year.  Those shipments were arriving at the same time that concerns about the consumer environment escalated.  However, sales during the early half of the important holiday period have been strong, and apparel imports have been falling.  These two developments may help alleviate inventory issues in the U.S. and support some order placement upstream in supply chains.

Nonetheless, it should be remembered that the full effects of higher interest rates tend to be lagged by a year or more, which suggests that economic conditions could continue to soften into 2023.  With recent decreases, cotton prices have fallen behind those for crops that can compete with cotton for acreage.  Lower cotton production resulting from lower acreage may become a source of support for the market once the world pulls itself out of the current slowdown and into recovery.  In the meantime, it remains to be seen how deep an economic decline might be and when the recovery might surface.

Monthly Economic Letter – December 2022

Disclaimer: The information contained herein is derived from public and private subscriber news sources believed to be reliable; however, Cotton Incorporated cannot guarantee its accuracy or completeness. No responsibility is assumed for the use of this information and no express or implied warranties or guarantees are made. The information contained herein should not be relied upon for the purpose of making investment decisions. This communication is not intended to forecast or predict future prices or events.