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 was a little late getting resolved.  Last 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, and has held on to that level through April.   Then in the May WASDE, they finally made the expected reconciliation of production, ginnings, and classings.  I don’t expect much if any adjustment remaining to the 2022 crop size.

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 May 18, weekly U.S. net export sales for the current 22/23 marketing year continued at the modest/weaker level of the preceding weeks.  This pattern generally still fits with recent price movements.  The pace of actual export shipments of all cotton (i.e., upland and pima combined) maintained above the necessary weekly average pace.

But there’ possibly more to it.  Emerging demand issues could paint a more bullish demand picture for the end of the current marketing year. First, there are mostly anecdotal reports of economic stabilization in China following their post-pandemic re-opening. This is feeding into as argument that the world cotton demand picture is not as fundamentally bad as USDA paints it. This view attributes weakness in ICE futures more to “artificial” reasons, e.g., the result of the currently large short speculative position.  The theory goes that the lower prices dip into the 70s, the closer they are to China’s historical price point for large scale buying of U.S. cotton. And as we progress into the spring and summer, we enter the season when China historically mopped up available U.S. stocks at the lowest prices.  This theory would be tested by seeing a succession of strong export sales to China. If that were to happen, that could spark a fundamental rally with short covering jet fuel. Of course, all this assumes no international conflicts or worsening of world economies.