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How Low Can They Go? COVID-19 Isn’t the Only Threat to Cotton Prices

Already depressed cotton prices could go even lower if demand bottoms out from coronavirus pandemic disruptions and the U.S. and China revive their trade dispute, Cotton Incorporated said in a new report.

Cotton Inc. said the evolving global situation is putting increased pressure on prices that have declined over the past month. The New York futures contracts for May fell to near 61 cents per pound from levels near 70 cents per pound in early February. Prices for the December contracts that are indicative of expectations after the 2020-21 harvest moved in the same pattern, but values were slightly higher. Most recently, December futures were trading near 62 cents per pound.

The A Index, an average of global spot prices, fell to 73 cents from 77 cents per pound in the last month. U.S. spot cotton prices averaged 57.53 cents per pound for the week ended March 5, down from 60.84 cents in the prior week and from 68.17 cents a year earlier, according to the U.S. Department of Agriculture (USDA).

“The rapid spread of the coronavirus has significantly altered macroeconomic conditions,” Cotton Inc. said. “The Organization for Economic Cooperation and Development ventured a revised forecast for global GDP growth in 2020 in early March that suggested a 2.4 percent increase in economic activity. If realized, this would be below the 2.9 percent growth rate experienced in 2019 and would be in the opposite direction of the acceleration in global GDP assumed by the USDA in its early 2020-21 forecasts” for cotton.

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The report noted that global growth in 2019 was the slowest since the Great Recession and that deceleration from that weak level does not suggest strength on the demand side of the balance sheet and implies downward risk to consumption estimates.

“Including March, there are still five months remaining in the 2019-20 crop year, meaning there is ample time for the coronavirus and the slowdown in economic activity it can bring to lower expectations for the current crop year, as well as the upcoming 2020-21 season,” Cotton Inc. said.

The USDA lowered its consumption number for China this month. Reports indicate that China is returning to regular business conditions, which could mean that further decreases in Chinese consumption could be limited, the report noted.

“Nonetheless, delays have been registered throughout supply chains,” Cotton Inc. said. “The resulting logistical bottlenecks, along with the spread of the virus beyond China, pose risks to demand. If global conditions do not clear up quickly, weakness from the demand side could erase the production deficit projected by the USDA in 2020-21.”

The report stressed that while COVID-19 and macroeconomic conditions dominate demand-related concerns at the moment, the U.S.-China trade dispute and its potential impacts “should not be forgotten.” With the Phase One agreement now in effect, if the targets laid out in it are not met, both sides could escalate the conflict, Cotton Inc. said.

“The trade dispute has been identified as a contributing factor for the economic slowdown in 2019,” the report added. “If tensions flare again in 2020, economic growth could end up being lower than currently expected.”