RECENT PRICE MOVEMENT
New York futures and the A Index decreased over the past month. Chinese prices were stable. Indian and Pakistani prices moved lower.
• After decreasing throughout July, prices for the December New York futures contract found support near 62 cents/lb in early August and have been holding to values between 62 and 64 cents/lb recently.
• The A Index decreased sharply on August 1, when the delivery terms were shifted to months after the 2014/15 harvest. Recent levels near 73cents/lb are the lowest since 2009. Due to a general increase in staple length over the past several years, Cotlook indicated that staple length for the reference quality for the A Index will increase from 1-3/32” to 1-1/8” in the 2015/16 crop year. The base grade is expected to remain unchanged at Middling (color grade 31, leaf grade 3).
• Despite decreasing in local terms (from 17,300 to 17,100 RMB/ton), the CC Index has been stable in international terms (near 126 cents/lb) due a strengthening in the exchange rate of the RMB against the dollar.
• Spot rates for India’s Shankar-6 variety decreased in international terms, falling from levels near 90 cents/lb to those near 84 cents/lb. In domestic terms, prices fell from 42,000 to 40,000 INR/candy.
• Pakistani spot rates declined more steeply than other benchmark prices last month and declined nearly ten cents/lb (from 74 to 64 cents/lb). In local terms, prices decreased from 6,200 to 5,300 PKR/maund.
Supply, Demand & Trade
Both world production and consumption estimates for the 2014/15 crop years increased in the latest USDA report. The global harvest figüre was revised 1.2 million bales higher, from 116.4 million to 117.6 million. The global milluse estimate rose 1.3 million bales, from 111.3 million to 112.6 million. With nearly offsetting changes to world production and consumption figures, the 594,000 bale decrease to the global ending stocks forecast (from 105.6 million to 105.1 million) was primarily a result of the 599,000 bale decrease in the amount of cotton estimated to have been carried forward from the 2013/14 crop year. At the country-level, the largest changes for production were made for the U.S. and India, with forecasts for each of these countries rising 1.0 million bales. For the U.S., the increase was primarily a result of a reduction in the expected abandonment rate. The increase to the Indian figure followed the recent acceleration in monsoon activity, which pulled year-to-date rainfall totals closer to long-term averages. Notable decreases were made for southern hemisphere producing countries. Australia has been suffering from extremely dry conditions, and the Australian production forecast fell 200,000 bales (from 2.7 million to 2.5 million). Brazilian planted acreage can be sensitive to prices for other crops, and since planting in Brazil for the 2014/15 season will ocur in coming months, the recent decreases in cotton prices fed into lower expectations for Brazilian acreage and a 700,000 bale reduction to the crop forecast (from 8.0 million to 7.3 million). Lower cotton prices could also be expected to stimulate demand and may be a reason for this month’s increase in the global consumption estimate. Country-level in creases to mill-use figures were made for India (+500,000 bales), Vietnam (+350,000), Bangladesh (+100,000), and Turkey (+100,000). Import forecasts rose for Vietnam (+400,000 bales), Bangladesh (+100,000), and Turkey (+100,000). Export forecasts rose for the U.S. (+500,000 bales), India (+300,000), and Brazil (+300,000), but were lowered for Australia (-300,000).
Price Outlook
The most likely factor driving reductions in price over the past few months has been the projected increase in available supply. For the past several crop years, when the Chinese reserve system was an aggressive buyer, available supply was generally considered to be ending stocks for the worldless-China, and lower levels for stocks outside China were considered supportive of global cotton prices. In 2014/15, however, ending stocks for the world-less-China are forecast reach a record high of 42.7 million bales. This volume is slightly higher than the world-less-China stocks estimates for 2011/12 (42.4 million), when the A Index averaged 100.0 cents/lb, and for 2006/07 (42.3 million), when the A Index averaged 59.1 cents/lb. 2011/12 was the crop year when the Chinese reserve system emerged as an aggressive buyer. During that time period, it could have been appropriate to view the cotton purchased by the reserve system as indefinitely withheld from the market and to be concerned about strengthening Chinese import demand. These considerations would have put the weight of uncertainty more heavily on the side of potential tightening of available supply and likely prevented prices in 2011/12 from approaching 2006/07 levels. Another factor to consider relative to the volüme of world-less-China stocks and their relationship with world prices during the 2011/12 crop year is that there was considerable uncertainty regarding Indian trade restrictions and Indian cotton stocks. In later crop years, large upward revisions were made to Indian ending stocks based on information not available during the 2011/12 crop year. Although clarification has not been forthcoming regarding how China will manage accumulated reserves, the government announced this spring that it will no longer be making purchases through its reserve system. An implication stemming from this announcement is that uncertainty regarding possible actions relative to the reserve system have shifted. Instead of being a negative force relative to available supplies, by buying and withholding, reserve actions can now be viewed as a neutral or positive force, by either holding or selling what has already been accumulated. Correspondingly, the weight of uncertainty in the coming crop year has shifted from how much China will absorb to how much China will release, and available stocks for the next several crop years should be considered to be the sum of world-less-China stocks and an unknown proportion of Chinese reserves. This implies an even greater increase in available stocks than is described by the record world-less-China figüre forecast for the current crop year and suggests prices could remain at levels closer to those from 2006/07 than those from 2011/12.
