Cotton Market Fundamentals & Price Outlook3 min read

The latest USDA report featured a small increase in 2019/20 global
production and a decrease in 2019/20 global mill-use. The addition to the
world harvest projection was 263,000 bales, bringing the current forecast
to 121.6 million. The world consumption figure fell 850,000 bales,
bringing the current forecast to 118.2 million.
Along with an increase in beginning stocks (+191,000 bales to 80.2
million), the combination of a larger crop and lower offtake lifted the
figure for global ending stocks (+1.3 million bales, to 83.4 million). This
number is above the tight range between 80.2 and 80.8 million maintained
since 2016/17 but is well below the level of 90.1 million bales in 2015/16.
At the country-level, notable changes to production numbers included
those for the U.S. (-302,000 bales, to 19.8 million), Brazil (+300,000, to
13.0 million, matching the record for Brazilian production), Chad
(+235,000, to 325,000), and Tajikistan (+130,000 to 570,000).
The largest changes to mill-use figures included a 1.0 million bale
reduction for China (to 36.5 million) and 100,000 bale increases for
Bangladesh (to 7.4 million) and Turkey (to 7.3 million).
Global trade forecasts were mostly unchanged (+25,000 bales to 43.6
million). Notable changes in import figures included those for China (-
250,000 to 8.3 million) and Bangladesh (+100,000 to 7.4 million). The
largest revisions for export estimates included those for Brazil (-100,000
to 8.8 million), and Chad (+110,000 to 200,000).

PRICE OUTLOOK

The USDA released preliminary estimates for the 2020/21 crop year
at their Agricultural Outlook Forum in late February. Globally,
expectations were that production would decrease by about three million bales, to 118.5 million (current 2019/20 number is 121.6 million). World
mill-use was expected to tick higher (to 121.0 million bales, the current
2019/20 number is 118.2 million) due to an assumption of stronger global
economic growth. In combination, the decrease in production and the
increase in consumption were expected to result in a production shortfall
of about three million bales.
The corresponding reduction in global ending stocks would put
carryout at the end of the upcoming crop year just below 80 million bales.
That level would be marginally below the range between 80.2 and 80.8
million bales that was maintained between 2016/17 and 2018/19. A drop
below that range could be interpreted as a positive for cotton prices (crop
year averages for the NY nearby were between 73 and 79 cents/lb
between 2016/17 and 2018/19).
However, even though these figures are only a few weeks old, the
rapid spread of the coronavirus has significantly altered macroeconomic
conditions and makes the recent USDA estimates for 2020/21 feel dated.
The Organization for Economic Cooperation and Development (OECD,
a group representing 36 nations with a goal of promoting global growth)
ventured a revised forecast for global GDP growth in 2020 in early March
that suggested a 2.4% increase in economic activity. If realized, this
would be below the 2.9% growth rate experienced in 2019 and would be
in the opposite direction of the acceleration in global GDP assumed by
the USDA in their early 2020/21 forecasts.
In 2019, global growth was the slowest since the financial crisis.
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.
The USDA lowered its consumption number for China this month.
Reports are that China is returning to a more normal set of business
conditions already, which could mean that further decreases in Chinese
consumption could be limited. Nonetheless, delays have been registered
throughout supply chains. 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.
It remains very early for 2020/21. Planting is just starting in a few
warmer regions of the northern hemisphere, and there is a lot of weather
to be experienced before the next harvest. The coronavirus and
macroeconomic conditions dominate demand-related concerns at the
moment, but the trade dispute and its potential impacts should not be
forgotten. The Phase One agreement is now in effect. If the targets laid
out in the agreement are not met, further escalation may occur from both
sides. The trade dispute has been identified as a contributing factor for
the economic slowdown in 2019. If tensions flare again in 2020,
economic growth could end up being lower than currently expected.

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