Dip in Cotton Futures Explained


Cotton Inc. Economist Jon Devin’s weekly update on cotton markets:

Recent Price Movement

Cotton prices continue to be heavy.

Recent values for the most-actively traded May contract have been setting a series of life of contract lows.

The dip below support near the 58 and a half cent mark sent prices briefly below 58 cents.

Export Sales Better

The recent tick towards lower levels has occurred despite some positive news from export sales.

In data released late last week, sales volumes set a high volume mark for the crop year

Export sales data are published with a slight lag, and the move below 60 cents/lb a few weeks ago likely were behind some of the bounce.

Despite the uptick, sales for the crop year remain well behind the level from last year.

The current volume of sales and shipments remains more than 30% behind the level at the same point last season.

In future months, we likely will see the USDA’s forecast for exports fall further.

The further it falls, the higher that ending stocks will be, and the more stocks that we have, the harder it is for prices to move higher.

USDA Meeting Looks Forward

Although the next set of official USDA numbers is not due for another couple week, we will get an early look at expectations for the 2016/17 balance sheet at the USDA’s Outlook Forum later this week.

At this meeting, the USDA releases a partial set of forecasts.

Among the numbers released are global figures for production and consumption, as well as projections for a handful of world’s major cotton countries.

In the coming year, in terms of production, the largest country-level change may be expected for China, where acreage is expected to decrease.

The decline in China may be offset by higher production for Pakistan, where adverse growing conditions last season could be expected to ease in the coming crop year.

Depending on the size of the changes, and other developments on the weather front, world production could be expected to be relatively flat year-over-year.

Demand-Side Questions

Bigger questions arise from the demand side of the balance sheet.

The most important variables that the USDA considers when formulating forecasts for cotton consumption are price and the health of the world economy.

Global economic growth is not great, so it may be tough to get much of a boost from macroeconomic conditions.

Lower cotton prices are associated with stronger growth in mill-use.

However, these are not normal times.

Although cotton prices are much lower than in recent years, there was a period of several years when cotton was at an extreme disadvantage relative to polyester and this has resulted in an erosion of share.

Whether or not current cotton prices in the high 50s might be enough to swing share back in a major way remains to be seen.

A challenge is that polyester prices are low.  This is due in part to lower oil prices, but is also due to overcapacity in China.  That overcapacity has made it a buyers’ market for polyester in China.

This matters because China is home to 60-70% of world production and consumption of polyester, and with Chinese policies maintaining high premium prices for Chinese cotton, it has been an uphill battle for cotton’s share in the country.

Expectations are that the Chinese government will become more aggressive in terms of moving their cotton by lowering their prices.

The degree to which that happens can be expected to influence cotton’s share and therefore use in coming years.

With so much of the demand outlook centered on China, it will be interesting to see the assumptions that the USDA has built into their preliminary figures.

A native of the Texas Panhandle, Rhonda was born and raised on a cotton farm where she saw cotton farming evolve from ditch irrigation to center pivot irrigation and harvest trailers to modules. After graduating from Texas Tech University, she got her start in radio with KGNC News Talk 710 in Amarillo, Texas.