While some uncertainty has been removed from the cotton market when it comes to supply, as the North American harvest winds down after some weather disturbances, questions seem to be mounting regarding demand and price stability.
Cotton Incorporated’s latest analysis of the global market emphasizes that the U.S., China and European Union each reported slower economic growth in the third quarter and at the same time, the trade relationship between the U.S. and China “continues to present a major source of uncertainty.”
This month, the U.S. Department of Agriculture (USDA) made its first adjustment to U.S. production since observing damage from Hurricane Michael, which hit the largest producing states in the Southeast. Due to the storm, the U.S. crop forecast was lowered 1.4 million bales to 18.4 million bales.
On the economic side, slower economic growth generally leads lower consumer demand for apparel and home textiles. This usually results in slower growth in mill-use, according to Cotton Inc., and the weaker outlook for gross domestic product (GDP) likely contributed to significant downward revisions to consumption estimates this month.
The U.S. GDP growth was reported at 3.5 percent in the Bureau of Economic Analysis’ advance estimate for the third quarter last week, following 4.2 percent growth in the second quarter. IHS Markit’s “November U.S. Economic Forecast Flash” said the 10 percent tariffs on $200 billion of imports from China that went into effect in September, and the increase to 25 percent tariffs that could take effect in January “are boosting the near-term inflation forecast, but should have only a modest (negative) impact on real growth.”
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“We look for GDP growth to rise from 2.5 percent last year fourth quarter over fourth quarter to 3.1 percent this year, before slowing to 1.5 percent by 2021,” IHS economists said.
On the trade front, Cotton Inc., said, “In recent weeks, the outlook has wavered between expectations of further escalation and hope for compromise, but the effect on U.S. export commitment to China has been increasingly negative. Initially, the response of Chinese mills to the tariff increase on U.S. cotton appeared to be one of wait-and-see, maintaining existing contracts but holding off on purchases of new ones. More recently, cancelations have begun.”
Despite starting the crop year with 36 percent more cotton contracted for shipment to China than last year, the current U.S. commitment to China is now 12 percent below the volume a year ago.
The impact on cotton prices hasn’t been too dramatic, yet.
With the cancelations from China and below-average sales to other markets, Cotton Inc. said U.S. export commitments have been flat. If that persists, U.S. contract sales will fall below the level from a year ago at some point in the coming few weeks.
“The smaller U.S. crop resulting from hurricane damage is a mitigating factor, but fewer U.S. exports suggest higher U.S. ending stocks,” Cotton Inc.’s monthly report said. “With the U.S. being the world’s largest exporter, this can put downward pressure on prices globally.”
U.S. spot cotton prices averaged 74.83 cents per pound for the week ended Nov. 8, up from 74.13 cents per pound the prior week and 66.94 cents a year earlier, according to the USDA. Values for December New York futures have been steady, trading between 76 cents and 80 cents per pound of late. The global Cotlook A Index has also been steady since mid-October, maintaining levels near 87 cents per pound.
Cotton Inc. said a longer-term stabilization of Chinese reserve stocks, which would mean a rise in Chinese cotton imports to match its China’s production deficit, would help pricing power. However, even though this strong increase in demand is expected, and with Chinese mills facing the constraint of higher tariffs from the world’s largest exporter, the U.S., “Chinese prices have been decreasing,” suggesting, according to Cotton Inc., that “demand may currently be a greater concern than supply.”
This can be seen in weak U.S. export sales beyond China. For example, U.S. sales to Turkey, traditionally among the top three destinations, are down 46 percent year over year, while sales to other markets have also been slow in recent weeks.
“This is notable because this is the time of year when U.S. export sales generally start to accelerate as more cotton has been harvested, classed and prepared for shipment,” the report noted.