The seven-market U.S. average cotton spot price, which ended 2016 at just under 68 cents per pound, peaked at 78 cents in mid-May. From there, it fell by nearly 18 percent in the next two months to 64.5 cents before rising steadily through most of the rest of the year through Dec. 22.
Stocks outside of China, most of which are freely traded, are expected to grow by nearly 25% this year, to their highest level ever, according to the USDA, with stocks in the U.S., the world’s largest exporter, forecast to more than double compared to last year. It is important to make the distinction between supplies inside and outside China since Chinese supplies have largely been government-controlled, with Chinese import quotas at low levels, reducing its direct interaction with the world market.
With supply expected to increase so much, it may seem counterintuitive that prices are rising. However, many factors impacting cotton have been difficult to predict. Revised global production and mill-use estimates indicate supply has actually been tighter than many forecasters previously thought. “The increase in prices has occurred despite expectations for a big increase in supply outside of China,” said Jon Devine, chief economist at Cotton Incorporated, in an email to Sourcing Journal.
The difficulty in forecasting is not new. Devine remarked that the current situation, where supply and demand forecasts suggest prices should move in the opposite direction in which they are moving, also occurred late last year, when the USDA was forecasting a large increase in U.S. stocks, after which unseasonably strong export sales throughout the winter months supported prices, and the USDA revised its forecast.
The USDA has already revised its estimate of the 2017-18 global cotton harvest down by 1.5 million bales (a bale equals 480 pounds) to 120 million, with the biggest downward revisions for India and Pakistan. The estimate for ending stocks has decreased by 2.9 million bales to 88 million. Global mill use estimates were revised slightly higher as well.
“There is some disagreement currently regarding stock levels in India, with some estimating agencies indicating that Indian stocks could be 5-10 million bales less than what the USDA estimates,” said Cotton Incorporated’s Devine. “Despite the discrepancy in the level of stocks in these countries, the direction of change in supply indicates that stocks in India should rise this year.”
There is also reportedly some contention regarding Chinese stocks (outside of government reserves), with some estimating agencies indicating that stocks in China could be several million bales lower than the USDA figures. Lower Chinese supplies suggest China may need to import more. This should be expected to support prices eventually, particularly if China lifts imports.
Cotton production for the 2017/2018 season is now expected to rise by 15 million bales over the 2016/2017 season, with global mill use expected to increase by almost 5 million bales.
U.S. cotton exports are forecast to rise by almost 2.7 million bales.
Although evidence points to continued support for current or even higher price levels, recent history shows that the future of cotton prices remains to be seen. A drastic change in policy by China, an increase in consumer demand for cotton, improved information about stocks in India and Pakistan, and a change in growing conditions could all push 2018 prices in one direction or another.