Cotton futures proved one of the agricultural commodity sector’s worst performers of 2022.
With losses of 25% so far, they are on course for their worst year since 2014, undermined in particular by worsened world economic expectations – to which cotton, as an industrial commodity, is particularly vulnerable.
Still, the price rout of 2014 was followed by three successive years of price gains. Will 2022 herald recovery too? Leading commentators give their outlooks.
The Cotlook ‘A’ index is forecast to average 98 cents per pound in the 2022-23 marketing year, down 26% compared to 2021-22.
A mix of macroeconomic factors is depressing demand for cotton garments across major economies. Inflation, increasing interest rates and the prospect of slowing economic growth in the United States and the European Union are expected to reduce discretionary spending, including on clothing.
Meanwhile, Covid-19 related lockdowns and ongoing problems in the real estate sector are squeezing consumer spending in China.
On the supply side, global cotton production is forecast to remain relatively unchanged in 2022-23. Sharp declines in the Cotlook ‘A’ index through the second half of 2022 reflect the deterioration in the outlook for cotton demand. Futures contract prices suggest further significant downside price movements are not expected over the coming months.
The Cotlook A stood at 101.00 cents per pound as of December 28.
Looking beyond 2022, we expect prices to find support from a weakening US dollar and increasing import demand, largely caused by US trade restrictions on mainland China.
We expect global cotton output to reach 118.1m bales in 2023, up from 117.6m bales in 2022. Of the primary producers, we expect to see an increase in mainland China, India and Brazilian production.
Despite this, we expect global production growth to remain marginal. The US and Pakistan have both been hit by adverse weather conditions in 2022, with Pakistan experiencing extreme floods.
We expect demand to remain subdued in 2023, owing to a bleak economic outlook. At Fitch Solutions, we expect global consumption to decline 2.4% year-on-year, reaching 114.2m bales.
However, despite a slowdown in global consumption, the USDA expects import demand to increase marginally.
A rise in global import demand is expected due to a substantial increase in mainland China’s imports, and this will drive prices upwards in 2023.
China’s solid import demand has been supported by US regulations prohibiting the purchase of items produced in China’s Xinjiang region, the region which accounts for around 80% of Chinese cotton production. Consequently, Chinese cotton mills looking to export textiles have had to increase their dependency on imported cotton, helping support global prices.
Fitch forecasts Ice cotton prices in 2023 averaging 94 cents a pound, on a second contract basis.
Alongside the rest of the softs complex, cotton has underperformed as global end demand has slowed, but, with the US crop losing the battle for acreage with corn and soy and facing severe heatwaves last summer, we believe prices will struggle to see persistent declines below 75 cents per pound despite falling demand.
With emerging markets facing rising energy costs and falling consumer real incomes, mill demand globally is weakening.
With the US Department of Agriculture downgrading global demand by more than the fall in US supply, global stocks are expected to build to 87.9m bales in 2022-23.
As a result of the cyclical softness, we see cotton prices range-bound at 80, 90 and 84 cents per pound on a three, six, and 12 month horizon.
Cotton futures warranted a sell-off from spring highs above 150 cents a pound – what, with a faltering world economy undermining demand prospects while world production looks like holding steady in 2022-23, on USDA forecasts.
However, there are limits.
Cotton futures also deserved their recovery from late-October lows below 70 cents a pound. Yes, world supplies are rebuilding from lows beneath 82m bales in 2016-17.
But world inventories – on course to end this season at 86.5m bales, on USDA estimates – are nowhere near the glut levels reached eight years ago. Then, they topped 108m bales, precipitating 2014’s price slump.
That doesn’t give buyers such cause for comfort. And, indeed, one metric offers cause for concern.
Cotton is very much losing the battle for US acres in spring sowings programmes, given the rewards it is offering farmers compared with those to be gained from rival crops.
The fibre is worth, on a new crop futures contract basis, 3.4 times as much as soybeans and 7.4 times as much as corn. A year ago, the comparative figures were 4.3 times and 9.3 times.
Cotton looks like suffering a substantial decline in US sowings next year as it is. Price falls from here, unless matched by declines in the likes of corn and soybeans too, would only worsen area prospects.
Cotton prices will no doubt in the course of normal market volatility suffer some declines ahead. But these should be seen more in terms of buying opportunities for consumers than as likely to set a significant trend.