Policy Uncertainty. The last several years have been a case study in how foreign government policies have influenced the cotton market. The two major examples are India’s domestic minimum support price program and China’s stockpiling policy. The latter has been the dominant thing hanging over the cotton market for the last five years, but it now appears to be on an expected path to whittling down the reserve in a fairly transparent and least disruptive manner.
The final national cotton progress reflected that the 2016 crop was relatively late, as shown by a seven percentage point lag in the U.S. harvest (through November 28). As of USDA’s June WASDE report, forecasted U.S. cotton planted acreage was 10.07 million acres, while 9.51 million were expected to be harvested. The first real benchmark of production (the August WASDE) projected 15.88 million bales of U.S. all cotton production, 6.33 million of which were from Texas. There have been numerous subsequent revised projections of U.S. cotton production, which is normal. Historically, the average adjustment to USDA’s August projection of U.S. production has been 6% higher or lower compared to the final estimate this coming July.
Lastly, it is good to remember that cotton is a global commodity, and market-shaping adjustments to production will likely happen outside of the U.S., for example, in Africa ( here and here), India, Pakistan, and Australia.
Demand Uncertainty. For U.S. cotton, the two main demand categories are domestic mill use and exports. Domestic U.S. consumption is estimated by USDA at 3.3 million bales. Exports are generally a more important source of demand as they represent 80% of projected total use of 2016/17 U.S. cotton. For the week ending June 15, shipments remained above the necessary average weekly pace. In terms of new export sales bookings, the week ending June 15 saw improved old crop export sales at at 177,000 running bales of all cotton (upland and pima combined) for delivery in this marketing year. An astounding 475,300 running bales were booked for export in the next marketing year, i.e., after August 1.
There has been a remarkable expansion of demand with a strong upward trend in both price and export sales since last summer. In keeping with demand theory, the fluctuations in export sales around that trend are in line with the expected response to observed price shifts. But the uptrend itself reflects an outward shift of the demand relationship, and is likely due to the U.S. being this season’s source of better quality, as well as due to (perhaps temporary) glitches in India’s ability to ship cotton. While this is a positive thing for prices in the 2016/17 marketing year, the effect of quality may not outlive this marketing year.