By Jon Devine, Sr. Economist, Cotton Inc.
Global cotton prices declined for a second consecutive month. Values for the nearby May NY futures contract set a series of life-of-contract lows over the past month, with prices dropping from levels near 59 cents/lb a month ago to those near 56 cents/lb. In the latest trading, values have rebounded above the 58 cent mark, but current levels are among the lowest since 2009. The A Index also lost about three cents/lb. Recent values have been between 64 and 65 cents/lb.
Since September, every monthly update to the USDAΆs supply and demand figures has featured decreases to both world production and consumption. This monthΆs report was no exception, with the global harvest number dropping 1.2 million bales (from 101.4 to 100.2 million) and the global mill-use projection falling 400,000 bales (from 109.6 to 109.2 million). Current estimates for both production and mill-use are the lowest since 2003/04.
PRICE OUTLOOK
As has been the case for the past several crop years, a central variable shaping price direction is Chinese government policy. Rumors of an impending release from Chinese reserves, with prices significantly below current cash values (CC Index), are commonly cited as a primary reason that prices around the world have moved lower over the past couple months. Relative to current CC Index values near 82 cents/lb, prices for forward contracts on ChinaΆs CNCE platform (contracts with delivery in July and August are trading below 70 cents/lb) as well Chinese ZCE futures (contracts with delivery in September are trading near 72 cents/lb), suggest that Chinese prices could decrease about 15% in coming months.
However, no price-related details regarding an upcoming set of auctions have been officially released. If the expectations for the drop in Chinese prices expressed by CNCE and ZCE markets are confirmed by an upcoming government announcement, there is potential for Chinese spinning mills to become more competitive internationally and for Chinese mill-use to increase. The USDA is expecting China will start to more aggressively move cotton from reserves by lowering prices, and that Chinese mill-use will increase by one million bales in the coming crop year (from 32.0 to 33.0 million bales).
This scenario should be positive for global cotton usage in the long-term, because it suggests Chinese cotton prices will become more competitive with Chinese polyester prices and therefore should help market share. In the short-term, however, there could be negative impacts on global demand due to a contraction in Chinese yarn imports. Year-over-year, the volume of Chinese cotton yarn imports were down 10% in December and down 27% in January. The degree to which these decreases are sustained in coming months could affect mill and export demand outside of China and keep downward pressure on prices.
