2023/24 Outlook Caveats

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.

The supply question for the 2023 crop should be a settled matter.  This matches the seasonal pattern reflected by the monthly percent deviations to the final forecast (see chart below), the production forecast will zero in on the final, real number as the months pass.  As this happens, any remaining risk premium in ICE old crop cotton futures has faded away.

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 May 23, weekly U.S. net export sales for the current 23/24 marketing were strong.  They reflect the normally expected inverse pattern of U.S. price-to-quantity demanded. The pace of actual export shipments of all cotton (i.e., upland and pima combined) remained below the weekly average to reach USDA’s annual export forecast.

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.   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.

On the other hand… (yes, there is always another hand), a bullish demand outlook can be woven together beginning with a mismatch between strong retail clothing sales with retail de-stocking (the latter a reaction to fears of an induced recession by high interest rates).  This situation reinforces anecdotal evidence of textile mills being covered only in the near term with available supply.  This suggests the possibility of an increased pace of weekly export sales.  Combined with potential, eventual cuts in interest rates, and assumed economic growth, this scenario paints a picture of surging demand to make up the gap. There are lots of ifs to play out under this bullish demand scenario, but if they did it would show up in the weekly export sales data as a lot of upward spikes in weekly export sales, as well as strength in ICE cotton futures.




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