Home Brokerage Do Cotton-Market Dynamics Suggest Higher Prices Are Around the Corner?

Do Cotton-Market Dynamics Suggest Higher Prices Are Around the Corner?

by internationalbanker

By Valerie Hernandez, International Banker


It was perhaps the most rangebound market across the entire commodities complex. Cotton futures contracts had traded within an approximate 14-cent band between 76 cents and 90 cents per pound since November 2022. But with that range decisively breached in February, when a pronounced rally sent prices soaring briefly above 100 cents before returning down to earth, the outlook for cotton is now not so certain. Indeed, perhaps the most pertinent question regarding the global cotton market in 2024 is whether prices will remain confined to this long-term 80¢-90¢ range or break free in one direction or the other. Current market forces of tight exportable supply and buoyant consumption suggest higher prices could be in the offing.

Indeed, the 76-to-90-cent range held firm throughout the 15-month period until market resistance broke in early February 2024. During this time, it was only briefly tested in August 2023 after the U.S. Department of Agriculture (USDA) issued a report that cut domestic output forecasts by more than 15 percent, triggering the smallest domestic cotton harvest since 2015—a projected supply cut at a time when China’s cotton imports looked set to rise.

The surge in cotton futures in February brought the market to life. According to market analysis from Jon Devine, senior economist at Cotton Incorporated, the rally coincided with an increase in participation in the futures market, with open interest on actively traded contracts rising by a hefty 33 percent in the two months from mid-January to register the highest interest of the crop year.

“The increase in open interest signals a flow of investment into cotton futures,” according to Devine’s “Monthly Economic Letter March 2024”, published on March 11, which cited data from the Commodity Futures Trading Commission (CFTC) about the volume of cotton futures positions held by different types of market participants, including 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,” Devine also observed. “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.”

Although many point to the speculative component of the market at the time as being chiefly responsible for the rally, the distinct tightness on its physical supply side is also likely to have been supportive, with subdued global crop forecasts helping to boost cotton prices. According to the latest projections from the USDA, published on April 15, global cotton production for the 2023/24 season (August–July) will total 112.9 million bales, nearly 3 percent below the 2022/23 season, as “offsetting changes” for major producers keep this season’s total crop forecast at a six-year low.

The USDA also noted in its earlier March report that Pakistan and Brazil are the only major producing countries that show increases from last year, up 72 percent and 24 percent, respectively. But declines across several major cotton-producing countries comfortably offset them. “Australia, the United States, China, and India all decreased production in 2023/24. China and India remain the leading cotton producers, accounting for a combined 47 percent of world production this season.”

In the United States, accounting for 11 percent of the global crop in 2023/24, the crop forecast for the 2023/24 season is set to be the lowest in at least 14 years. At the USDA’s estimate of 12.1 million bales, this year’s crop will be 16 percent below the 2022 total and near 2009/10’s recent low of 12.2 million bales. “Based on the latest production estimate and beginning stocks of 4.25 million bales, the 2023/24 US cotton supply totals 16.4 million bales, about 2.2 million below 2022/23 and the lowest since 1984/85,” the USDA also noted in its April 15 outlook.

For India, meanwhile, 2023/24 cotton production is estimated by the USDA at 25.5 million bales, 3 percent below last season’s crop, with both the total harvested area of cotton and the yield being lower. “Harvested area is estimated 2 percent lower, while this season’s national yield declines to 437 kg per hectare, slightly below the 3-year average. India is forecast to account for 23 percent of world cotton production in 2023/24.”

On the market’s demand side, moreover, China’s cotton imports are projected to increase to 14.2 million bales, a whopping 128 percent above 2022/23 levels, which should also support prices. “These increased imports are primarily to replenish the national reserve. China’s cotton import estimate accounts for 32 percent of the 2023/24 global total (43.9 million bales) and is significantly higher than 2022/23’s share of 17 percent,” the USDA noted in its April 15 report. “Imports for the rest of the world are estimated at 29.7 million bales. Meanwhile, the United States and Brazil are the leading cotton exporters to the world in 2023/24.”

Global cotton-mill use, meanwhile, is projected to increase by 1.4 percent to 112.8 million bales in 2023/24, led primarily by Pakistan, India and China, with the USDA noting Turkey as being the only major cotton-spinning country to show a decline (-7 percent) from the previous year. “While China’s mill use is forecast unchanged in 2023/24 compared with last year, mill use in Pakistan, India, Vietnam, and Bangladesh is estimated to increase,” the USDA report confirmed. “World cotton trade is projected at 43.3 million bales this season, a 17-percent increase from 2022/23, as Brazil’s exports and China’s imports rise significantly. Global ending stocks are projected to remain about 83.3 million bales, marginally above 2022/23.”

“Global consumption is the big surprise this season. Given the turmoil with the global economic conditions and low consumer confidence, we expected consumption to remain lower this season. In fact, early numbers suggested production would outpace consumption by a healthy margin,” the International Cotton Advisory Committee (ICAC) recently acknowledged in its monthly report published on April 1, which noted that global consumption had markedly picked up in recent months. “This is no longer the case. Consumption is now ahead of production by 80,000 tons. This is due in part to the fact that global markets stabilized with the successful reduction of inflation in many large countries.” According to the intergovernmental cotton body, global consumption is now posting gains of 4 percent over last season.

This combination of lower production and higher consumption points to somewhat bullish market dynamics for cotton prices this year. Indeed, the ICAC’s current price forecast for the 2023/24 season-average A index, which is considered representative of the benchmark price of spot cotton on the international market, ranges from 85.67 cents to 100.62 cents, with a midpoint at 92.20 cents per pound.

The ICAC has also forecasted gains for the 2024/25 season across all major variables—the cotton-producing area, production, consumption and trade—compared to the 2023/24 season. According to its report:

  • Area shows a 3-percent increase over 2023/24 at 32.85 million hectares.
  • Production shows an increase of just over 2.5 percent at 25.22 million tons.
  • Consumption is forecast to increase by 2.9 percent to 25.37 million tons.
  • Trade (imports and exports) is forecast to increase nearly 4 percent over the 2023/24 cotton season to 9.94 million tons.

Global yield is also expected to drop slightly (0.12 percent) to 768 kilogrammes per hectare (kg/ha), thus extending its long-term trend of falling yields since the 2017/18 season. The ICAC has attributed this drop to extreme weather caused by global climate change and pest pressures brought on by adverse weather conditions, also a result of global climate problems.

As the global leader in cotton production, consumption and imports, moreover, China could well hold the key to realising higher global prices, especially with the ICAC forecasting the country’s total harvestable area and production to both decrease in the 2024/25 season by a substantial near-6 percent to 2.7 million hectares and 5.27 million tons, respectively. “Consumption is expected to increase by nearly 4 percent to 8.1 million tons, which would suggest China will need to import significantly more cotton than in the 2023/24 cotton season,” the ICAC report stated. “We currently forecast China will increase imports by 600,000 tons of cotton from their major importing partners, including the United States, Brazil, and Australia. If this forecast is true, then India is expected to become the world leader in cotton production for the 2024/25 season.”


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