2022/23 Outlook Caveats

Policy Uncertainty. The last ten years have been a case study in how foreign government policies have influenced the cotton market.  Several major examples are India’s domestic minimum support price program, the 2018 U.S. farm bill, the U.S.-China Phase One Agreement, the U.S. Market Facilitation Program, and the U.S. CARES act funding.

Supply Uncertainty.

The supply question for the 2022 crop is a little late getting resolved.  In August, USDA cut an historically large three million bales off of their previous month’s forecast.  The direction of that adjustment was not a surprise to anybody, but the size of it surely was.  Then, in September, USDA’s National Agricultural Statistics Service (NASS) reversed themselves and added one a quarter million bales back to their forecast of U.S. cotton production, to 13.83 million bales of all cotton (i.e., upland and pima combined).  USDA’s October production estimate was little changed, but USDA raised their forecast in November, and again in December, and again in January.  This has been a surprise since most expectations were for downward adjustments to U.S. production.

Regardless, time is running out for a reckoning of the U.S. production question.  Harvest and ginning are finishing, if not over. But in early January there was a 1.5 million (statistical) bale discrepancy between USDA AMS’s count of classed bales and USDA NASS’s production forecast.  By January 26, that gap had shrunk to 536,357 statistical bales (i.e., 14.68 million bales of production minus 14.14 million statistical bales classed).  So we’ll have to see if the final reckoning comes in February.  My expectation is that forecasted production will be cut around 400,000 bales in the February WASDE.

This above expectation is supported by historical data.   Figure 1 shows the percent deviations of USDA’s U.S. cotton production forecasts in August, September, November, December, and January relative to the final production estimate at the end of the marketing year (i.e., the following July).  As expected, the spread of the percent deviations shrinks across the fall season, presumably informed by more data.  In particular, the historical chart below suggests that there is only room for a 2.5% adjustment (or about 376,000 bales) between the January forecast and the final number.  I would assume that there is enough expectation of such an adjustment that the price effect is already baked into the futures 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 at 2.30 million bales. Exports are generally a more important source of demand as they represent 84% of projected total use of 2022/23 U.S. cotton.  The main indicators of export demand are weekly sales and shipments of U.S. cotton. For the week ending January 19, weekly U.S. net export sales for the current 22/23 marketing year were stronger, for the second week in a row.  Albeit delayed, this fits with the price declines that we saw last fall.  The pace of actual export shipments of all cotton (i.e., upland and pima combined) is below par, compared to the weekly average needed to reach 12 million bales.  However, the is seasonally normal to have below average shipments in the fall and above average shipments in the late spring and summer.




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