In recent days, a series of news that could impact cotton prices has continued to come out, such as China's state cotton auction policy, lower planted areas of US cotton than anticipated, locust in India and the lower refinancing and rediscount interest rates from July 1. Under these influencing factors from supply side, the weakness in downstream market is even not mentioned. This article summarizes the main factors affecting the current cotton price and the status of the industry, and makes some views on the future market.

1. The impact of state cotton auction
For the detailed influences on the state cotton auction, please see the previous article: 2020 China state cotton auction begins, how about the impact? In summary, the cotton prices will have no large downward pressure caused by the cotton auction, but the sales of reserved cotton are bound to put pressure on spot cotton market. Due to the price and quality of the reserved cotton, some mills are unable to use the reserved cotton or show lower buying interests. However, under the influences of COVID-19 pandemic this year, part of mills has reduced the quality of cotton yarn and turns to produce low-count yarn. Therefore, this part of mills will turn to use reserved cotton, which brings pressure on spot cotton.

2. The impact of the locust plague in India
Although various news indicate that the situation of the locust in India is very serious, actually, the impact of locusts on Indian cotton is supposed to be limited. Recently, the locust was concentrated around the cotton growing areas in North India. With the monsoon rains, the locusts have not reached the central or southern cotton growing areas as forecast. In addition, due to the early arrival of the monsoon rains, the progress of cotton planting in India has accelerated. According to the weather forecast, there will be plenty of rainfall afterwards in India, which not only helps to maintain a faster cotton planting progress, but also is not conducive to the propagation and migration of desert locusts.


3. The impact of Australian cotton production reduction and US cotton drought
Recently, a piece of news about a reduction of 83% in cotton production of Australia lures much attention. However, the reduction is mainly for the current season. And for 2020/21 season, ABARES forecasts that the output may recover to 384,000 tons due to improved water storage.

For the current Australian cotton, demand is relatively thin. The main export destination of Australian cotton in the 2019/20 is China, while the high-quality cotton yarn is greatly affected by the pandemic, which has a certain impact on Australian cotton demand. In addition, the political conflict is also serious.

The most influential factor on the supply side is the US cotton. In its June acreage report, USDA estimated planted cotton acres at 12.2 million acres for 2020, down 11 percent from last year. Upland area is estimated at 12.0 million acres, down 11 percent from 2019. American Pima area is estimated at 195,000 acres, down 15 percent from 2019. Then, USDA may revise lower the US cotton production. But if the reduction of harvested areas is smaller than that of planted areas, the cotton production may not reduce much. Currently, USDA forecasts 2020/21 US cotton production at 4.2456 million tons, and based on the latest planted areas and the yield of last year, the production is forecast at 4.54 million tons, higher than the USDA's estimation. By now, the progress of cotton squaring and setting bolls is normal, and if the reduction on harvested areas is small, the US cotton output may not reduce much.

Barring the planted area, the market is currently more concerned about the drought in the cotton planting area of Texas. The good-to-excellent ratio of U.S. cotton crops is lower than the same period last year, while the ratio in Texas declines from 23% to 21%. At the same time, ICE cotton futures market is relatively firm recently supported by the continual purchase from China and the action of US Fed. However, from the perspective of the global cotton market, new cotton crop is picking in Brazil and Cotton Corporation of India offers more discounts on the sales of 2018/19 and 2019/20 Indian cotton. If ICE cotton futures market continues to rise, the price edge of Brazilian and Indian cotton will appear gradually. Besides, the downstream demand is still in slow recovery. If China stops purchasing US cotton after completing the Phase One Trade Agreement, the pressure on ICE cotton will appear again.

4. Downstream market
In June, downstream market goes weaker gradually, especially the grey fabric market.　By Jul 3, operating rate of weaving plants has reduced by 3.7% from Jun 1, and some weaving plants also plan to have holiday for the high temperature. Operating rate of cotton yarn mills also reduces slightly as some small mills cut operating rate or suspend operation. Conventional cotton yarn sales slow down and producers provide discounts to sell. Imported cotton yarn is also sold with discounts with the higher arrivals.

On spot cotton market, the trading sentiment weakens obviously in June. Although mills have rigid demand for cotton on low feedstock inventory, the purchasing willingness has weakened compared with May. Trading volumes of spot cotton reduce obviously. After the start of state cotton auction, mills that could use reserved cotton turn to purchase reserved cotton, and the demand for spot cotton lowers.

In summary, the impact of the locust plague on Indian cotton is relatively small. The impact of the decline in the US cotton planted area and the drought in Texas is relatively more substantial. From the perspective of the global cotton market, new cotton crop is picking in Brazil and Cotton Corporation of India offers more discounts on the sales of 2018/19 and 2019/20 Indian cotton. If ICE cotton futures market continues to rise, the price edge of Brazilian and Indian cotton will appear gradually. Besides, the downstream demand is still in slow recovery. If China stops purchasing US cotton after completing the Phase One Trade Agreement, the pressure on ICE cotton will appear again. Downstream demand remains sluggish. Some mills have turned to produce conventional cotton yarn and low-count cotton yarn, and some mills turn to purchase reserved cotton, which brings pressure on spot cotton consumption. The pressure from downstream market is gradually building up.