Policy Uncertainty. Policy changes are a common source of surprises (“shocks”) to cotton market outcomes. Recent years provide numerous case studies. Some examples include India’s domestic minimum support price program, the U.S. 2018 farm bill, the U.S.-China Phase One Agreement, the U.S. Market Facilitation Program, the U.S. CARES Act, U.S. trade sanctions on products from Xinjiang Province, and the periodic policy announcements of the Chinese National Development and Reform Commission, which include management of their cotton reserves, and cotton import quota announcements. The most anticipated policy event on the horizon is the 2025(?) Farm Bill.
Supply Uncertainty.
The cotton market continues to wrestle with the question of the size of the 2024 U.S. cotton crop. The first question is how much acreage has been planted. The price of competing crops, relative to cotton prices, is an important consideration to the level of planted acreage. The chart below shows a fairly strong relationship between the level of U.S. upland and pima cotton planted, as measured on June 30, and the ratio of December CBOT corn futures and ICE cotton futures during the first quarter of the year. The higher the ratio, the less cotton is planted. Of course, there are other important competing crops as well: sorghum, soybeans, peanuts, and perhaps wheat. And there are other non-price influences, including how dry it was in Texas, the insurance base price, fixed cost influences, and the psychological influence of the preceding growing season. But the price ratio of corn to cotton appears to capture a lot of these other influences in explaining variations in cotton plantings.
Demand Uncertainty. For U.S. cotton, the two main demand categories are domestic mill use and exports. Domestic U.S. consumption is forecasted by USDA a little over two million bales. Exports are generally a more important source of demand as they represent over 80% of U.S. cotton use. The main indicators of export demand are weekly sales and shipments of U.S. cotton. For the week ending October 31, 2024-25, net sales of U.S. cotton for export were stronger than in prior weeks, finally reaching decent levels over 200,000 bales.
Lastly, there is the question of longer term demand. I am cautious about the possibility of macro headwinds related to world GDP, inflation, and central bank policy. Stagflation is a possible risk that is historically associated with declining cotton demand. Short of that, just having low, slow growth in the world economy could deprive the cotton market of sustained price support, leaving only the volatile and short lived weather market influence discussed above.