International Commodity Exchange (ICE) cotton futures for December delivery fell 0.6% Thursday to an 18-month low of 72.06 cents/pound – a level last seen November 23, 2012. A similar trend was seen in the iPath DJ-UBS Cotton Subindex Total Return SM Index ETN (BAL), which declined 0.5% (23 cents) to $48.68 on Thursday. Since the start of the year, cotton futures have fallen 15% and are currently down 26% from their March 26 high of 97.35 cents/pound. Since then, their prices have plunged on a recent International Cotton Advisory Committee (ICAC) report, which has forecasted higher production and weak consumption this year.
In April, there were serious concerns that global cotton supply would suffer because of the drought in Texas, the nationΆs leading cotton-growing state. However, this concern is no longer an issue, as monsoon rains in India have come to the rescue. The US Department of Agriculture (USDA) has subsequently adjusted its estimates for 2014-15, and now predicts that global production will reach 118.1 billion bales – 1 billion bales higher than last year.
China, one of the chief producers of cotton in the world, is also a major importer of the commodity. It imported 5.3 million tons of cotton last year. This year, however, the Independent Commission Against Corruption (ICAC) forecasts ChinaΆs imports to be closer to 2.1 million tons following the changes made to ChinaΆs subsidy policy. China is moving away from guaranteed prices to direct payments to farmers.
The lower demand for cotton has pushed the ICAC to revise down global cotton imports to nearly 35.6 billion bales, compared to last yearΆs 41.1 billion.
The demand and supply patterns discussed above can result in the accumulation of 8.7 million tons of cotton outside the US this month (7% higher than last year). Since these surpluses are available for international trade, they will exert further downward pressure on cotton futures prices and on exchange-traded funds (ETF) weighted with cotton stocks.
According to a survey of seven analysts conducted by Bloomberg, cotton futures may drop by another 6.1% to 67.7 cents/pound, their lowest level since June 2012.
