August 2017 Market Summary
International cotton prices fluctuated within a fairly narrow range during August. The 2017/18 Cotlook A Index (shipment no earlier than October) began the season on August 1 at 79 US cents per lb, some five cents below the final value recorded by the expiring 2016/17 Index (August/September shipment) on July 31. The persistently tight supply situation supported shippers’ price ideas and the A Index climbed to a high point of 81.35 US cents per lb early in the month, before an unexpectedly bearish crop forecast from USDA prompted a sharp decline in New York. The Index fell to a low point of 77.40 US cents per lb mid-month, but weather events in the United States and the aforementioned scarcity of supply saw asking rates drift upwards, prompting the Index to revert and end the period at 80.90 cents per lb.
Market activity remained sluggish during most of August, though spinners with requirements to cover before the arrival of Northern Hemisphere crops continued to enquire for lots afloat and nearby. Remnants of African Franc Zone cotton, as well as US and Australian, continued to feature in gap-filling purchases, but sourcing of cotton was increasingly difficult. Basis levels remained firm, and the strong premiums applied to nearby lots engendered caution in some mills, which was exacerbated by the bearish statistical position and approaching availability of new crops. However, the slump in prices following USDA’s crop report facilitated the conclusion of some business. Import demand emanated from several markets, mainly for Brazilian and US cotton, among others. Several Far Eastern markets registered sales for the first quarter of 2018.
Sales commitments from the US 2017/18 crop are already substantial, and shipment for the earliest arrivals was already difficult to secure when the aforementioned weather event, Hurricane Harvey, made landfall over South Texas late in the month. The storm caused severe flooding and loss of life, and arrived over the worst affected areas as picking was in full swing. The volume of cotton lost or damaged had yet to be assessed by the end of the month, a task that could take considerable time. As the cotton in the affected region constitutes the earliest of the US crop to be picked and transported, a further tightening of the already restricted supply seems unavoidable.
USDA’s August forecast of domestic production, the first of the season to be based on actual field surveys, took place before the arrival of Hurricane Harvey and was pitched higher than the expectations of many trade observers. Washington posited output of 20.545 million bales (480 lbs), which would represent the highest since 2006/07. Cotlook initially adopted that figure, but the subsequent storm prompted a downward revision to 20.2 million bales, a move that may prove conservative as the extent of damage becomes clear. However, the volume of cotton lost is unlikely to dent expectations of a bumper crop in the US in 2017/18.
The other major change to Cotlook’s assessment of global production concerned an increase for India. Planting data show a considerable increase in planted area, to almost 12 million hectares, a figure likely to be surpassed as planting continued in several major producing states. Generally good weather conditions contributed to optimism regarding yields, and our forecast was raised to 38 million bales of 170 kgs, around ten percent more than the previous season.
The only other notable change was for China, where helpful weather conditions and an expectation of very good yield (supported by promising results from early picking) bolstered production prospects. The range of estimates remained fairly wide with significant discrepancies between the ideas of some organisations, but Cotlook’s figure was placed at 5.16 million tonnes, in line with Beijing Cotton Outlook’s August assessment. Hence, our world forecast of production in 2017/18 was raised to almost 25.5 million tonnes, representing an increase of 11.6 percent from the previous season.
On the consumption front, the major change was also for China, in reflection of increasing consumption in Xinjiang, the major producing region. The higher consumption estimate was also supported by the continuing strength of sales from the State Reserve auction series, which attracted robust participation throughout the month. Early in August it was confirmed that the auction series would be extended until the end of September, a move that was anticipated in trade circles, and by the end of August the total volume sold was approaching 2.7 million tonnes. State Reserve stocks are expected to fall to a level around 5.6 million tonnes by the end of September, by Cotlook’s calculation (presuming that daily sales maintain a pace of roughly 25,000 tonnes, which seems achievable). However, whether that level is approaching the point at which Chinese authorities would consider a relaxation of the import restrictions which have been in place during recent seasons remains to be seen.
The only other notable adjustment to consumption was in India, the figure for which was raised to just shy of 5.3 million tonnes. A sizeable crop is expected to weigh on prices and stimulate consumption. Smaller amendments were made for various other markets, including a moderate increase for Uzbekistan and a slight decline in Japan.
By late August, an addition to global stock levels of 589,000 tonnes therefore appeared in prospect at the end of 2017/18, up from the 282,000 put forward a month earlier. However, that figure continued to disguise the disparity between the situation in China and that in the rest of the world.
Inside China, a considerable reduction was still anticipated, of 1.9 million tonnes (a moderate improvement on the previous month), owing entirely to stock disposed of via State Reserve channels. Outside that country, our figures continued to imply an addition that will more than offset the Chinese reduction, resulting in an addition to ‘rest of world’ stocks of almost 2.5 million tonnes.