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Cotton Incorporated: Global Market Fundamentals, Price Outlook

Cotton Incorporated: Global Market Fundamentals, Price Outlook

24 June 2014

GLOBAL - According to a report by Cotton Incorporated, both New York futures and the A Index moved lower last month while Chinese prices remained stable.

Recent Price Movement

  • The nearby July New York futures contract lost about 8 cents/lb over the last month, generally dropping from 93 cents/lb to 85 cents/lb.
  • The level of open interest for the New York December contract surpassed that for the July contract early this week. Prices for December futures fell about the same amount as the July contract last month, decreasing from 84 to 77 cents/lb.
  • The A Index has decreased five cents/lb, decreasing from 94 cents/lb to 89 cents/lb, reaching its lowest levels since January.
  • After declining rather steeply in April, the CC Index stabilized last month. In international terms, prices held to values near 126 cents/lb. In local terms, prices were steady near 17,400 RMB/ton.
  • Spot rates for India's Shankar-6 variety decreased in both international and domestic terms over the last four weeks (from 91 to 89 cents/lb and from 43,000 to 41,600 INR/candy).
  • Pakistani spot rates increased two cents/lb last month, rising from 82 to 84 cents/lb in international terms. In local terms, prices increased from (6,700 to 6,800 PRK/maund).

Supply, Demand & Trade

In their June report, the USDA increased world production and consumption estimates for both 2013/14 and 2014/15. The world production figure for 2013/14 increased 1.0 million bales (from 117.1 million to 118.1 million) and was entirely a result of greater expectations for the Indian harvest (+1.0 million, from 29.5 to 30.5 million). For the upcoming 2014/15 crop year, the global forecast rose 465,000 bales (from 115.5 to 115.9 million).

Virtually all of the increase to the 2014/15 world production estimate was a result of improved growing conditions in the U.S. The projection for the U.S. 2014/15 crop increased 500,000 bales (from 14.5 to 15.0 million) and was a result of sorely needed rains that arrived in West Texas in late May. West Texas is the most concentrated growing region of the U.S. cotton belt, and with most of cotton acreage in the region not irrigated and completely dependent on rainfall, the threat of widespread abandonment was reduced with recent precipitation. Nonetheless, West Texas remains very dry and uncertainty regarding the potential for additional rainfall as the crop develops remains an important issue for the world price outlook.

The estimate for global mill-use in the 2013/14 crop year increased 446,000 bales (from 109.4 to 109.8 million) and the projection for use in 2014/15 rose by 457,000 bales (from 111.8 to 112.3 million). The changes to world figures were driven by country-level revisions for India (+750,000 bales for both 2013/14 and 2014/15), Pakistan (-500,000 bales for both 2013/14 and 2014/15), and Vietnam (+200,000 bales for both 2013/14 and 2014/15).

Trade is expected to decrease in the coming crop year, with imports forecast to decline 13% (from 41.1 million bales to 35.6 million). The global decline is primarily a result of a projection for lower Chinese imports. Revisions to USDA estimates in the current report suggest the difference between 2013/14 and 2014/15 Chinese imports will be wider than previously forecast. The 2013/14 estimate was lifted 750,000 bales to 13.5 million and the 2014/15 figure decreased 500,000 bales to 8.0 million. Other significant changes to country-level import figures include those for Pakistan (-500,000 bales in both the 2013/14 and 2014/15 crop years), Vietnam (+150,000 in 2013/14, +200,000 in 2014/15), and Turkey (+250,000 bales in 2013/14).

The largest revisions to export figures were for Australia (+200,000 in 2013/14, -100,000 in 2014/15), India (+200,000 in 2013/14), Pakistan (+200,000 in 2013/14), the U.S. (+100,000 in 2013/14), Turkmenistan (-100,000 in 2014/15), Brazil (-200,000 in 2014/15), and Uzbekistan (-200,000 in 2014/15).

Price Outlook

An aggregate effect of this month's revisions was an 806,000 bale increase in stocks estimated to be held outside of China in 2014/15 (from 41.1 to 42.0 million). The current figures indicate stocks outside China will be about 10% higher at the conclusion of 2014/15 than at the end of 2013/14. Since stocks outside of China are considered available to the world market, the increase in available supply is a likely reason why futures markets in both the U.S. and China have consistently traded at levels where prices for cotton delivered after the 2014/15 harvest have been about 10% lower than prices for cotton delivered from 2013/14 supply.

Whether or not a decrease of this magnitude is realized in coming months will be determined by several factors. One of them will be the weather, notably whether West Texas will get more rain. Another set of questions for price direction result from Chinese cotton policy. While general reforms have been announced, specifics regarding the implementation of the target price system have yet to be revealed. Other key uncertainties involving Chinese policies include possible changes to reserve auction prices and the amount of import quota that might be issued.

The price outlook is also complicated by the interaction between prices and mill-use. Since the 2010/11 price spike, Chinese cotton policies have supported world cotton prices. This support can be seen as beneficial since it likely reduced volatility. However, by preventing the collapse in prices that could have been expected with the rise in production and decrease in consumption that followed the spike, the unprecedented accumulation of reserves in China can also be seen as inhibiting a recovery in global demand.

As Chinese policies are relaxed, cotton prices are expected to ease, and this could lead to higher consumption. In China, lower domestic prices are a likely reason why Chinese mill-use is forecast to increase 4.2% in 2014/15. Global use is projected to rise 2.5% to 112.3 million bales. This volume is about 10% higher than the post-spike low in 2011/12 (103.1 million bales) but about 10% lower than the peak in 2006/07 (124.0 million). Alongside population and economic growth, lower cotton prices resulting from increased available supply could facilitate demand growth in coming crop years.

Further Reading

You can view the full report and read more from Cotton Inc. by clicking here.



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