RECENT PRICE MOVEMENT
Chinese and Pakistani prices declined rather sharply last month, while other international benchmarks were steady.
. Prices for the March New York futures contract were largely unchanged and were remained within the same range between 58 and 61 cents/lb that they were in last month.
The A Index has also been relatively stable, holding to levels between 65 and 69 cents/lb.
Chinese prices, as described by the CC Index, began another round of decreases in late November. Over the past month, the CC Index lost a further 7%, falling from 110 cents/lb to 102 cents/lb in international terms and from 14,800 RMB/ton to 13,900 RMB/ton in local terms.
Even with the recent declines in cash prices described by the CC Index, the Chinese ZCE futures market continues to predict further losses. Values for the most-actively traded May contract have dropped to levels near 95 cents/lb (12,900 RMB/ton).
Indian spot prices for the Shankar-6 variety edged slightly higher in local terms, rising from 32,900 INR/maund in early November to 33,100 INR/maund in early December. In international terms, values were stable, varying only between 61 and 62 cents/lb.
Pakistani spot prices shifted lower in local terms over the past month, decreasing from 5,100 PKR/candy to 4,700 PKR/candy. In international terms, prices decreased from 61 cents/lb to 56 cents/lb.
SUPPLY, DEMAND, & TRADE
In the latest USDA report, forecasts for both world production and consumption decreased. The global production figure declined 630,000 bales, from 119.6 million to 119.0 million. At the country-level, the
only important changes to harvest estimates were for the U.S. (-474,000 bales to 15.9 million) and Greece (-165,000 bales to 1.3 million). The global consumption figure declined 1.3 million bales, with notable
country-level revisions for China (-500,000 bales to 37.0 million), India (-500,000 bales to 24.0 million), and Turkey (-100,000 bales, to 6.4 million). In terms of trade, there was little change to global figures, with the world import projection declining only 100,000 bales (to 34.2 million). The largest revisions at the country-level were for Turkey (-200,000 bales to 3.6 million), Thailand (-100,000 bales to 1.5 million), and
India (+300,000 bales to 1.1 million). The only notable change to export figures was for Greece (-145,000 bales to 1.0 million).
PRICE OUTLOOK
Price movement for the past several years can be explained through dynamics in exportable supply and import demand. When the Chinese government was making large purchases through its reserve system,
global import demand shifted higher as China allowed mills to fill orders with a higher proportion of imports relative to domesticallyproduced cotton. Strong Chinese import demand, along with the
persistent drought in West Texas that inhibited stocks from accumulating in the U.S., held exportable stocks at lower levels and supported higher prices for the past three crop years. In 2014/15, the situation is reversing itself. Easing drought conditions in West Texas have enabled a U.S. crop forecast to be 25%
larger than last year. At the same time, China is pulling back on imports. Chinese import quota is allocated on a calendar year basis, and while the recently announced contraction in quota allocation is for
2015, there is already evidence of diminished Chinese import demand. In the latest available data, Chinese imports for October were the lowest since early 2009 (81,898 tons, or 376,000 bales) and were 42% lower year-over-year. If quota is restricted as outlined by the Chinese government (that only 4.1 million bales of quota will be issued in 2015), similar year-over-year reductions could be expected in future months.
The corresponding pullback in Chinese imports could be expected to affect exporting countries in differently. U.S. exports decreased sharply last crop year, with shipments declining from the average of 6.1
million bales between 2011/12 and 2012/13 to only 2.7 million in 2013/14. The reduction in U.S. shipments can be explained through the combined effects of a small U.S. harvest (12.9 million bales) and lower Chinese demand. China imported 7.1 million fewer bales from all sources in 2013/14 than they did in 2012/13. Since there was a sharp reduction in U.S. exports last crop year, and since a smaller Australian
harvest will limit availability of quality cotton available from other sources, the U.S. may not experience as large of a decline in shipments to China as other exporters in 2014/15. India is a country that could be expected to suffer a significant decrease in exports this crop year. The quality of Indian cotton could
be considered substitutable to that grown in China, suggesting a feasible transition from Indian imports to Chinese fiber. More than half of India’s exports are shipped to China. In recent crop years, 25% of
India’s exports to China arrived in December, immediately before Chinese quota expires. If the steep drop in Chinese imports in October can be interpreted as an indicator for the future, there should be a
considerable evaporation of seasonal demand hitting the Indian market at the moment. The corresponding downward pressure on prices is likely being mitigated by purchases being made by the Indian
government. However, with limits on warehousing, those purchases could be expected to be released relatively soon. As that cotton makes it back onto the market, there could be renewed downward pressure on global prices with the consequent increase in exportable supply.
