August 2016 Market Summary
International cotton prices underwent a steady decline during August. An upturn in New York early in the month was subsequently more than offset by persistent price weakness. ICE futures settled limit down on August 9 and continued to drift lower throughout the month. The A Index had reached a peak of 85.85 US cents per lb on August 8, its highest point for more than two years, but lost more than 10 cents during the rest of the period, to end at a low point of 75.70 cents.
The collapse of futures tended to stymie forward buying confidence, and mill demand had remained concentrated on cotton available for nearby delivery in the first half of the month. However, stocks were becoming increasingly difficult to source and sellers were at times unable to fulfil mills’ requirements. Any remaining cotton afloat or on consignment generally found keen buyers. Australian 2016 crop, for example, continued to attract demand and had virtually disappeared by the end of the period.
As the month progressed, and the arrival of Northern Hemisphere new crops approached, increased demand was noted for cotton available for shipment in the fourth quarter and beyond. US, Brazilian, Greek and African Franc Zone crops were mentioned in this regard, among others.
US export commitments began the 2016/17 season on a strong note, with upland registrations rising by 200,000/300,000 running bales or more in successive weeks. By August 25, the cumulative total of all cotton (upland and Pima) for export in 2016/17 had risen to 4.48 million running bales, representing an increase of over 60 percent compared with the same point in the 2015/16 season. USDA’s expectation of increased exports between seasons, from 9.2 million running bales to 11.5, therefore began to appear more achievable than had earlier been considered likely, despite reduced import demand from China.
A modestly more active level of import demand was noted toward the end of the month from China, where it is believed that a significant portion of this year’s import quota remains to be used (perhaps 250,000/300,000 tonnes, according to private estimates). On August 8, it was confirmed that the auction series would be extended through to the end of September. Despite a drop in volume immediately following the announcement, turnover at the state reserve auctions was fairly well maintained. By the end of August, the total sold from Chinese state reserves had surpassed two million tonnes, the amount which was initially earmarked for sale.
In this regard, Cotlook’s estimate of Chinese consumption in the last and current seasons underwent significant upward revisions during August, of 310,000 tonnes each, to 7.2 million tonnes. Consolidating the perception that Chinese mill use will be supported has been the investment in spinning capacity in Xinjiang, which has been encouraged by various government subsidies.
Consumption forecasts were also revised upward for Bangladesh, where strong growth has been noted in the ready-made garment sector and spinning capacity has grown, in the latest seasons. Our figure was raised by 154,000 tonnes for 2016/17.
By late August, global consumption in 2016/17 was therefore expected to be 484,000 tonnes greater than put forth in our July estimates, at 23,706,000 tonnes. The envisaged growth between seasons remains modest at roughly 1.5 percent.
The major changes to Cotlook’s production figures for 2016/17 included increases for the United States and Australia and a decrease for India. In the US, favourable weather over West Texas during the month improved yield prospects, and our estimate was raised by 68,000 tonnes, to 3,479,000, implying an increase from the previous season of over 24 percent. USDA’s latest figure, which was based on assessments conducted before the receipt of good rain in West Texas, remains modestly below Cotlook’s number. However, late in the month unseasonable rain was received in parts of Texas, and Tropical Storm Hermine was forecast to make imminent landfall over the Southeast. Any unhelpful weather at this crucial point in the season would colour the production outlook; field conditions will be monitored closely in the coming weeks.
An upward adjustment of 112,000 tonnes was made to our Australian production number, owing predominantly to good precipitation which has helped to replenish reservoirs and improve planting prospects. At this early stage, great optimism has been displayed with regard to the potential increase in area, and a gain of perhaps 18 percent compared with 2015/16 appears in prospect.
Offsetting these upward adjustments was a reduction to India’s production figure. A lower planted area than had previously been envisaged is anticipated, with sowing by the end of August still lagging behind the pace of last year. Field work in the important Gujarat state slowed appreciably during the month and appeared to be drawing to a close, with the deficit between seasons standing at around 13.5 percent by August 29 (the national deficit stood at roughly 9 percent). Since the lower planted area promises to be offset by the proposed recovery in yields, Cotlook’s latest estimate envisages output in the region of 34.75 million 170kg bales, or roughly 5.9 million tonnes, modestly higher than last season. The Cotton Association of India’s latest assessment, released at the end of July, was less sanguine, placing output at 33.6 million bales.
The resultant, net adjustment in global production was therefore a modest increase of 65,000 tonnes compared with our July estimates, implying global output of 21,976,000 tonnes. World stocks were expected to contract by over 1.7 million tonnes at the end of the current season, compared with 1.3 million suggested a month earlier, with the fall remaining attributable to lower stock levels in China. A modest increase, of 121,000 tonnes, remained in prospect in the rest of the world.