Fitch Solutions, citing consumption concerns, sounded a cautious note on cotton prices, despite the sharp revision – to the tightest in 98 years – in the US forecast for its supplies of the fibre.
Fitch kept at 110 cents a pound its forecast for average New York cotton futures prices this year, on a second contract basis, implying values averaging 95 cents a pound for the remainder of 2022.
That is below the 113.95 cents a pound at which the December contract was priced on Monday – trading limit-up for a second successive session, on the US Department of Agriculture’s hefty downgrades to its forecast for domestic 2022-23 output, and carryout stocks.
The year-average forecast is also below the market consensus of 126.2 cents a pound, as reported by Bloomberg.
Demand worries
For 2023, while Fitch lifted its forecast for average New York cotton prices by 4.0 cents a pound, to 94.0 cents a pound, that too remained below the market value, and expectations of other investors.
The futures curve does not see prices falling below even 100 cents a pound until late 2023, with the Bloomberg consensus for an average price next year of 112 cents a pound.
Fitch said that while there was a “worsening near-term supply outlook, with harvest data indicating a significant decline in US and Brazil crop expectations”, the consumption picture had deteriorated too, with weakened economic expectations.
Separately on Monday, official statistics in China, the top cotton consuming country, showed worse-than-expected consumer and factory activity and am increase in youth unemployment to a record 19.9%,
‘Bleak economic outlook’
“On the demand side, we expect weakness throughout the remainder of 2022 and into 2023, forecasting a decline in cotton usage of 1m bales in 2023, representing a year-on-year decline of 0.81%,” Fitch said.
“A bleak economic outlook will continue to weigh on cotton prices and cap any sharp increases.”
While the analysis group expected a “strong year-on-year decline in the end-of-year cotton stocks in 2022”, to the tune of 5m bales, this had been driven by “solid demand” in the first half of 2022.
For the rest of the year, although the “negative production balance will help to continue to support prices, preventing sharp declines from its level”, Fitch added that “we expect a bleak macroeconomic climate and its impact on demand to cap any significant price upside”.
‘Back to a surplus’
Fitch forecast that “demand will remain depressed throughout a large part of 2023” too, allowing a return by the global cotton industry to an output surplus.
“Due to the macroeconomic outlook and our expectation of depressed demand throughout major importing nations, particularly mainland China, Bangladesh and Vietnam, we expect the cotton industry to swing back into a production surplus by 2023, following two years in deficit.”
The small upgrade to price expectations was “driven by negative US and Brazilian harvest data and concerns of unfavourable weather conditions persisting in China’s main cotton-producing territory, Xinjiang”.
For GrainPriceNews analysis of the cotton price outlook, click here.