The seven-market U.S. average cotton spot price, which ended 2015 at just under 63 cents per pound, dropped by almost 11 percent in the first two months of 2016 to 56 cents, then rose steadily to finish June at around 63 cents.
Largely due to tight supplies in key growing areas of India and Pakistan that were hurt by drought conditions, prices spiked in July to over 75 cents before settling down back down to 65 cents by late August. Since early September they have drifted higher again from 66 cents to just over 69 cents.
This upward trend, however, might not last too long.
Cotton Incorporated Senior Economist Jon Devine anticipates that the supply and demand situation will start to weigh on the market.
“Most major exporters will have larger harvests this year and will end up with more stocks at the end of the 2016/17 crop year than they had at its beginning,” Devine said. “As more and more cotton is pulled from the fields, ginned, and prepared for shipment over the next several months, those accumulating supplies can be expected to influence price direction.”
In the past month, the USDA has increased its forecast for the 2016-17 global cotton harvest by about one million bales, from 103.3 million to 104.2 million, with the biggest upward revisions for Australia, and the U.S. The forecast for world ending stocks increased by about 0.84 million bales, a result of projections for larger gains in stocks by the U.S., India and Australia.
Devine said key variables for prices over the winter will be the pace of U.S. sales, any news from China that alters current expectations for low levels of imports and how the large level of open interest in the NY futures market may evolve.
Devine pointed out that, importantly, the tightness in Pakistan and India experienced last spring and summer is alleviating, with better yields and bigger harvests expected in both locations.
However, complications surrounding the Indian government’s effort to increase transparency in its economy—particularly the elimination of the most commonly used currency notes—continue to disrupt the process of preparing Indian cotton fiber for shipment. Since many of the transactions that move cotton from Indian farms to gins/merchants/mills are based on cash, there has been less Indian cotton flowing through the Indian supply chain, but that process should improve in coming months.
Chinese cotton prices over the past couple of months have been relatively strong because of issues of accessibility. With nearly 80 percent of Chinese production in Xinjiang province and the vast majority of Chinese mills in eastern provinces, higher transport costs, limited railcar space and adverse weather have resulted in bottlenecks. Recent reports indicate, however, that transport problems are abating, and this may help Chinese prices ease.
The Chinese government released a statement noting that the next round of sales from reserves will recommence March 6, with auctions scheduled through the end of August. This could push Chinese prices lower. Prices will be determined by the same process as the last release, with each week’s base value derived as a combination of domestic and international prices.
Looking ahead even further, to the 2017-18 growing season, we can expect a similar set of supply and demand conditions.
“It is early, but the strength of cotton prices relative to prices for other commodities suggests that there will be further increases in acreage in many countries,” Devine said. “China has reiterated that it is not looking to increase imports any time soon, so we can probably expect further increases in stocks outside of China next crop year, which would imply continued downward pressure on prices.”