Riding a volatile wave in the first half of 2022 and adding to inflationary woes, cotton prices eased this summer. But the outlook is cautionary, as an uncertain economic picture and weather conditions paint a cloudy forecast.
“As we open the 2022-23 season, the cotton market is looking at a very uncertain future over the next few months,” the International Cotton Advisory Committee (ICAC) said in its outlook report.
“The first issue is the collapse of the crop in West Texas, which produces the majority of cotton for the United States, the world’s largest exporter,” the ICAC added. “Drought has prompted farmers to abandon virtually all non-irrigated cotton and now they’re beginning to walk away from the irrigated crop, too. It’s possible the deficit could be mitigated by good crops in the world’s other top-producing countries but there’s no guarantee that will happen.”
Making the situation even more volatile, jittery speculators and investment firms concerned about a global recession are driving prices down, ICAC said.
“This is an especially dangerous development because we don’t need to go into a global recession to cause problems;” it said. “Fear that we might go into a recession is sufficient to wreak havoc in cotton markets. Buckle yourself in because 2022-23 looks like it’s going to be a bumpy ride.”
A quarterly report from CoBank’s Knowledge Exchange echoed that feeling, noting that fears that the rapidly decelerating global economy stifled cotton demand have led December 2022 cotton futures to plummet 35 percent from their mid-May highs. However, CoBank economists believe the fears of plunging cotton demand may be overblown.
Cotton Incorporate senior economist Jon Devine noted in his August “Economic Letter” that most benchmark cotton prices rose over the previous month. After posting a series of solid increases, New York ICE December futures contracts rose 4 cents per pound to $1.09 on Aug. 12th following the release of the latest U.S. Department of Agriculture (USDA) supply and demand report.
This represented a sharp reversal relative to the collapse in June and July when values fell to 84 cents a pound from $1.20 a few months earlier. After dropping to $1.02 on July 15, values for the 2022-23 version of the A Index, a global average of spot cotton prices, moved steadily higher and reached $1.23 on Aug. 12.
U.S. spot cotton prices averaged $1.09 for the week ended Aug. 12. The weekly average was up from $1.06 the prior week and from 88.35 cents reported the corresponding period a year earlier, according to USDA data.
The latest USDA report featured decreases in global production and mill-use forecasts for 2022-23. The current projection calls for 82.8 million bales of ending stocks in 2022-23—the lowest volume since 2018-19, when global ending stocks were 81.5 million bales and the A Index averaged 84 cents per pound.
The U.S. forecast plummeted 2.9 million bales to 12.6 million. Devine said if realized, this would be the smallest U.S. crop since 2009-10. With this reduction, the U.S. dropped to the fourth position in the rankings of the world’s largest cotton producers behind China, India and Brazil.
The U.S. still ranks as the world’s largest exporter, with 12 million bales forecast ahead of Brazil’s expected exports of 9.3 million bales in 2022-23.
“Cotton prices continue to be caught between the two competing storylines that have been in play for the past several months,” Devine said. “On one side, there is the deteriorating global macroeconomic situation. The International Monetary Fund (IMF) lowered its projection for global economic growth in both 2022 (3.2 percent) and 2023 (2.9 percent) in the updates released in late July. Current IMF forecasts are significantly beneath those from January and April.”
Devine said the evolution in the macroeconomy was a likely factor contributing to the shift in investors’ outlook on the commodity sector, which led to a collapse in prices for cotton and a range of other commodities in June and July. There also could be factors associated with cotton supply chains that could affect demand during the current crop year.
“Downstream consumer markets for cotton can be viewed as more discretionary than other spending categories such as food, energy and lodging that experienced some of the sharpest effects of inflation,” Devine said. “Given price increases for necessities, consumers may have less income to devote to apparel and home furnishings.”
Tight U.S. supply is on the other side of price direction arguments, he noted. Cotton is drought tolerant and that is why it can be viably grown in perennially dry locations like West Texas. However, cotton requires some moisture to germinate and generate healthy yields and West Texas has had little rain over the past year and drought conditions have been extreme.
As a result, abandonment is forecast to be widespread. It remains to be seen exactly how small the U.S. crop will be, but the current USDA forecast predicts only 12.6 million bales in 2022-23, 5 million fewer bales than in 2021-22, Devine noted.
“Meanwhile, demand for U.S. cotton has been relatively consistent, near 18 million bales over the past five crop years,” he said. “A harvest of only 12.6 million falls well short of the recent average for exports alone and U.S. stocks were near multi-decade lows coming into 2022-23. All these statistics suggest shipments from the world’s largest exporter may have to be rationed in 2022-23.”
“If cotton is not readily available from other sources, the scarcity of supply from the U.S. could support prices globally,” Devine added. “Simultaneously, there is weakness from the demand side. The market has struggled to find the balance between the weakened demand environment and limited exportable supply in recent months. The conflict between these two influences makes it difficult to discern a clear direction for prices and suggests continued volatility.”