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.
Supply Uncertainty.
Cotton is a global commodity. Because the three largest cotton consuming countries (India, China, and Pakistan) are also major producers, as are the U.S.’s two leading export competitors, the global market can be highly influenced by variations in foreign production. Prior to harvest, and sometimes many months afterwards, the forecasts of U.S. cotton production will change with changing conditions and updated information. For example, the current milestone projection of U.S. cotton planted acreage is 10.23 million acres, based on USDA NASS’ June 30 Acreage report. Future adjustments to this number may come from USDA FSA certified acreage data, as well as from forthcoming USDA NASS surveys of farmers. Likewise there will be adjustments made to the estimates of harvested acreage and yield based on unfolding conditions. Eventually the estimates based on acreage*yield will be reconciled with forecasts of bales ginned (USDA NASS) and counts of bales classed (USDA AMS).
The current weekly Texas regional descriptions highlighted the effects of recent rains, freezes, and mixed soil moisture conditions (click here and scroll past the feature article). Drought conditions still cover much of Texas in the current drought monitor map particularly (and unusually) as one moves closer toward the coast. The 7-day rainfall accumulation map (through Friday November 10) reflected clearer weather across the Cotton Belt. Regular weekly assessments include USDA NASS reports on U.S. cotton progress and crop condition. For the week ending November 26 the rate of harvest was four percentage points ahead of the five year average. The current Texas condition rating represents the lower end of historical weekly crop condition ratings (see the chart below). Still, it should be noted that the pattern of weekly Texas cotton condition ratings (through November 26) doesn’t look particularly well correlated with the average Texas cotton yield.
Looking ahead, NOAA says that the current El Niño condition is likely to strengthen, implying wetter-than-normal conditions in the fall and winter. This sounds like a potential risk to fiber quality in 2023, but not much help to 2023 yields.
The bottom line of USDA’s September cotton balance sheet is a similar ending stocks outcome to the previous marketing year. If realized, that implies a relatively flat seasonal pattern for Dec’23 ICE cotton futures. e.g., between 78 and 88 cents. I expect the rallies to the upper end of the trading range to be volatile and perhaps short lived, as typical of a weather market.
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 November 9, weekly U.S. net export sales for the current 23/24 marketing year continued at decent levels. The uptick in recent export sales reflected the normally expected inverse pattern of U.S. price-to-quantity demanded, i.e., economics works. The pace of actual export shipments of all cotton (i.e., upland and pima combined) was below the necessary weekly average to reach USDA’s annual export forecast. Having said that, cotton exports have a seasonal pattern of being below average in the late summer and fall.
Lastly, there is the question of longer term demand. USDA is assuming robust demand to accompany the 16-something million bale crop that they are forecasting. I hope there is robust demand, but I am cautious about the possibility of macro headwinds related to world GDP, inflation, and central bank policy. Slipping into a recession 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.