Investors shouldn’t get too carried away by the squeeze on US cotton supplies.
Yes, New York futures deserved Friday’s limit-up performance, after the US Department of Agriculture, citing drought damage to the important Texan crop, slashed its forecast for US stocks of the fibre at the close of 2022-23 to 1.80m bales – the lowest on available data going back to 1960-61.
In terms of the stocks-to-use ratio seen as a key guide to price potential, inventories will represent just 12.6% of demand, the lowest figure since 1924-25, the USDA said.
However, the global cotton supply picture is not as dire.
Not the only origin
After all, other exporting countries have enjoyed a better cotton fortunes.
Brazil is poised for output of 13.0m bales in 2022-23, extending a recovery which took production to 12.0m bales last season, on USDA estimates.
That should lift the country’s 2022-23 exports to 9.30m bales, the second largest on record.
Australia’s exports will, with a second successive record-equalling harvest of 5.50m bales on the cards, hit a record 6.20m bales.
Indeed, rivals to the US – the top shipper – in trade will be able to pick up much of the slack created by the Texan drought.
Global exports will still rise in 2022-23, to 44.6m bales according to the USDA. It is just that a lower proportion will originate from the US, whose market share will fall below 27%, the lowest in seven years.
Meanwhile, demands from importing countries have declined too.
Fraying expectations for world economic growth have helped depress to 119.1m bales the USDA’s forecast for world cotton consumption this season, 2.9m bales below the initial estimate as released in May.
That has helped limit the tightening effect of the struggling US crop, with the world cotton stocks-to-use figure of 69.5% as of the latest Wasde not too much tighter than the 67.8% expected in May.
US price strength
Cotton markets have already factored in quite a lot for US woes.
Over the past month, the discount of US quotes to the world average, as represented by the Cotlook A index, has shrunk from 25 cents to 5.0 cents.
US prices (as measured by the USDA’s Agricultural Marketing Service) have gained a premium to those in top importer China (as relayed by the China Cotton Price Index) for “the first time in well over a decade”.
That doesn’t mean that there may not be more to go for New York cotton futures, which after all topped 150 cents a pound in May. But it looks unlikely that even such historically tight US supplies will spur a further spike in prices to that extent.