What now in cotton’s tug of war?
Investors had hoped that the US Department of Agriculture’s first full forecasts for world 2022-23 cotton supply and demand, as published on Thursday, would give fresh insights into a market caught between output fears for the US crop, and demand concerns stoked by economic uncertainties.
In fact, the estimates were less than decisive.
Yes, the USDA did bow to the worries over prospects for a US cotton crop grown largely on the drought-pressed southern Plains, forecasting US output down by 1.0m bales to 16.5m bales this year.
While sowings were pegged up 1.0m acres at 12.2m acres, “harvested area is expected to fall 1.1m acres to 9.1m as limited precipitation” in southern areas prompts abandonment to “more than double”.
US carryout stocks were seen shrinking by 500,000 bales over 2022-23 to a six-year low of 2.9m bales.
‘Limit spending on cotton’
However, unusually so early in a forecast period – in fact for the first time “in 36 years” – it acknowledged world economic worries too in predicting a fall in cotton consumption in 2022-23.
“Higher costs of food, transportation, and housing will limit spending on cotton products,” the USDA said.
“Consumers are expected to devote a greater share of disposable income to services relative to non-durable goods such as apparel this year and next year.”
The USDA forecast world cotton stocks of 82.8m bales at the close of next season, down by less than 1.0%, year on year.
Nor does the removal of China from the balance sheet, which often lifts the lid on the world market’s underlying dynamics, prove extra illumination.
Chinese stocks were forecast ending next season just 50,000 bales below the level at which they began it.
World ex-China data did not look that different to those incorporating the country.
So for guidance, it is back for investors to both studying the weather outlook for Texas, responsible for about one-half of US cotton production, and the economic runes, and whether perhaps stockmarket moves might set a direction for the fibre, as has often happened in the past.
Still, there are a couple of further points that investors might want to keep an eye on – one being the spread between New York’s July and December contract.
Chartists will be watching to see whether it can, again, bounce back from a heavy fall, and return to so-called bull spreading.
Another is the strength of prices in China, the top consumer and importer, where the Cotlook A index of physical values has in fact gained a rare premium.
The index “now exceeds China’s spot prices for the first time in 11 years,” compared with holding a 30-cents-a-pound discount two months ago, the USDA noted.
Worryingly, 11 years ago was when cotton futures set their record high above 200 cents a pound, before collapsing below 100 cents by the end of the year. And Chinese prices do have some record as a leading indicator.
It should be noted that cotton demand declines are hard to predict too.
While the USDA may have only once in more than three decades begun a marketing year expecting a fall, there have in fact been 13 episodes of declining consumption over that period – averaging a chunky 3.9%.
Bears look to GrainPriceNews to hold the advantage in the cotton market battle, but it may prove a slim one until a decent US crop is called.