Cotton has issued a reminder to grain investors to look on both sides of the balance sheet.

Futures in the fibre closed limit down on Wednesday after the US Department of Agriculture, in its flagship monthly Wasde report, slashed its forecast for world consumption by an unusually large 3m bales.

That was the biggest monthly downgrade since May 2020, amid the height of Covid concerns.

Grain investors too should remember that supply outlooks, and the course of the likes of La Nina and the Ukraine war, aren’t the only dynamics that determine prices.

‘Major macroeconomic concerns’

Sure, grains are much less vulnerable than cotton, an industrial commodity, to the “major macroeconomic concerns” that the USDA cited in slashing its cotton demand forecast.

While cash-strapped consumers can eschew buying new clothes to protect themselves from the cost of living crisis.

But holding off food purchases is a different matter.

The 2019-20 marketing year, which witnessed the worst of the pandemic jitters, tells a story in showing world cotton demand down 13.1%, on USDA estimates.

Consumption of the likes of corn, soybeans and wheat, by contrast, remained in positive territory.

Fuel link

However, that does not mean that grains demand is insulated from global economic fortunes – especially when some are increasingly popular in industrial uses, such as making biofuel.

World demand for corn, for instance, a key ethanol feedstock, expanded by only 0.2% in 2019-20, the second lowest rate of expansion in 20 years.

(The lowest was in 2012-13, when consumption actually dropped – although that was hardly surprising given the hit to supplies in the US, the top grower, from an extreme drought.)

Even for the likes of soybeans and wheat, demand growth has a habit of at least accelerating or decelerating as world economic fortunes wax and wane.

In the past decade, growth in world soybean and wheat growth has aped the world economic tide in seven years, and corn in eight.

Soy overoptimism?

OK, that is not a watertight case.

But it is reason enough to keep an eye on the demand side of things as the world negotiates its latest economic storm.

That looks particularly the case for soybeans, for which the USDA is factoring in demand growth of 4.6% in 2022-23, the most in six years, despite the major macroeconomic concerns it sees holding back cotton.

It may be signal that the USDA, even as it raised its estimate for the US crush this season, held forecasts for exports and domestic demand of soyoil, as used largely in making biodiesel.

Investors shouldn’t forget that supply tightness depends on levels of consumption, as well as production.