Driven by overall trade volatility, a lower production forecast and China’s uncertain policies, cotton prices are headed upward toward recent historic highs.
In its newly released monthly outlook, Cotton Incorporated said, “The global cotton market was volatile over the past month, with values for most benchmark prices moving strongly higher in the second half of May.”
Values for the July New York futures contracts surged to 95 cents a pound of late from levels near 84 cents a pound a month ago, the report noted. Values for the December New York futures contracts rose more sharply than those for July–to 93 cents a pound from 80 cents in early May. The A Index, an average of global spot prices, also climbed.
“One month ago, values for the A Index were near 94 cents a pound. The latest values have been over $1 a pound, marking the first time since March 2012 that the A Index has been over a dollar,” Cotton Inc.’s June report said. The high water mark was reached in 2008, when cotton prices topped $2 a pound due to a confluence of factors.
The U.S. Department of Agriculture’s (USDA) latest report shows spot prices averaged 90.27 cents per pound for the week ending Thursday. This is the highest weekly average since week ending Jan. 19, 2012, when the average was 90.39 cents, USDA said.
Synthetic fiber prices have also spiked recently, but eased off a bit in May. The U.S. Bureau of Labor Statistics Producer Price Index (PPI) showed the PPI dropped to 128.2 from 128.4 in May from April, but was still up 5.5% from a year earlier.
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Gasoline prices have helped feed to the rise in synthetics. A barrel of light sweet crude oil was up 25 cents to $66.89 at Thursday’s close on the New York Mercantile Exchange compare to $42.50 a year ago.
This month’s USDA report on cotton featured a reduction in the 2018-19 global production forecast to 120.4 million bales from 121.2 million bales and a marginal change to the global mill-use forecast. “With the estimate for 2018-19 beginning stocks unchanged, the net effect of this month’s revisions was to lower the forecast for 2018-19 ending stocks by virtually the same amount as the reduction in the production number,” to 83 million bales from 83.7 million,” the report said.
The largest changes to harvest expectations were for China, Pakistan, Australia and Brazil. Despite continued hot and dry conditions in the important West Texan region, no change was made to the U.S. production forecast.
Cotton Inc. said analysis suggests that this latest round of global volatility has a lot to do with China, where “in response to domestic volatility, the Chinese government made a series of announcements in early June. Generally, these statements emphasized the existence of adequate supply in the near-term and the ability to secure additional cotton as needed into the future.”
To curb speculation in cotton sold from reserves, the government banned traders and merchants from buying at auction, the report noted. Chinese officials also indicated that adverse weather throughout the spring in the important Xinjiang province, where 75 percent to 80 percent of Chinese production is, should have only a limited effect on yield, and that fears of a collapse in the domestic harvest were overblown.
“Importantly for the rest of the world, the Chinese government also reported that plans are in place to increase import quota, with officials indicating that sliding-scale quota can be released in the near future,” Cotton Inc. said. “These comments highlight a central source of uncertainty for the global cotton market during the 2018-19 crop year, which is how much more China cotton may import. With dry conditions affecting the largest growing region of the largest exporting country (West Texas, U.S.), the possibility of stronger than forecast Chinese imports underline the possibility of lower than expected ending stocks outside of China.”
The report did not make mention of potential U.S. or Chinese tariffs on imported cotton. But recent reports have warned of the price disruption they could cause.
USDA forecasts indicate that ending stocks outside of China will increase in 2018-19, adding to the record volume estimated for 2017-18, the report said.
“This volume will serve as a buffer against rising Chinese import demand, but there are questions about the accuracy of the USDA’s estimate for non-Chinese stocks,” the report noted. “The actual volume of stocks available for export to China, as well as the size of the increase in Chinese imports can be expected to determine price levels in 2018-19 and beyond.”