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.
Prior to harvest, and sometimes many months afterwards, the forecasts of U.S. cotton production will change with changing conditions and updated information. The January WASDE saw a notable one million bale cut in harvested acres, with a substantial 80 pound per acre raising of average yield. With that kind of an adjustment behind us, I have trouble seeing more significant changes going forward. USDA currently forecasts 12.10 million statistical bales in 2023 U.S. crop production, as of the March WASDE. USDA AMS counts 12.06 million statistical bales classed (as of March 7) while USDA NASS forecasts 12.158 statistical bales ginned (as of March 1). That doesn’t leave much room for further adjustments, e.g., within 40,000 to 60,000 bales, which they will likely (predictably, and unsurprisingly to the market) do in May.
This seasonal pattern is 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 associated risk premium in ICE cotton futures may probably fade.
Lastly, we must keep in mind that 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.
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 February 29, weekly U.S. net export sales for the current 23/24 marketing continued weak for the second week in a row. This downshift in recent export sales sorta reflects the normally expected inverse pattern of U.S. price-to-quantity demanded. In addition, the large inversion of old-to-new crop implies that mills may wait for the lower new crop prices. The pace of actual export shipments of all cotton (i.e., upland and pima combined) was over 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. 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.
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). Combined with short cotton supplies in the U.S., 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.