February 2018 Market Summary
International cotton prices drifted lower in early February, trading close to the Cotlook A Index’s low point for the month of just above 86.50 US cents per lb, and remaining within a fairly narrow range for the following couple of weeks. A rally in New York saw prices advance sharply from February 20, however, and on February 27 the A Index reached its high point for the month of 91.80 cents per lb. The rise in ICE futures during the later stages of the month was mainly influenced by a fresh wave of speculative buying. The huge volume of unfixed on-call sales on nearby March, mentioned in our last monthly report as a further bolster to New York, had declined by mid-month as speculators liquidated positions, and mill buyers found opportunities to fix their outstanding purchase contracts at more agreeable prices than had seemed achievable a short time earlier. The total amount of unfixed contracts is considered more manageable than a month or so ago. However, mill buyers continue to display a preference for ‘on-call’ purchases, for the May contract and beyond, and the total volume of unfixed contracts remains heavy.
Mill demand was fairly active early in the period, facilitated by the decline in asking rates. However, as the month wore on, purchasing reverted to a more routine pattern, prompted by spinners’ anticipation of a fresh price impetus, as well as holiday influences in the Far East (the Lunar New Year holiday saw many markets close between February 14 and 22). Indian cotton emerged as something of an exception late in the month, as basis levels were eroded by the shift in the relationship between local values, which have remained steady in dollar terms, and rising ICE futures.
The pace of US export commitments (all cotton) remained robust, and the desirability, on price grounds, of low Micronaire lint continued to contribute to the strength of sales. During the first three weeks of February, this season’s export sales commitment rose by more than a million running bales, bringing the cumulative total by the week ended February 22 to over 97 percent of USDA’s estimate for the season (14.5 million running bales), and almost 20 percent higher than the volume committed at the same point in 2016/17. The pace of shipments has continued to lag however, by the same date accounting for just 44 percent of cotton sold.
Trade attention has begun to focus more closely on the potential balance of supply and demand in the longer term, and February saw the release of Cotton Outlook’s initial tentative estimates of production and consumption in the 2018/19 season. It should be noted, though, that at this early stage all numbers remain subject to change over the coming months.
World production in 2018/19 is forecast at 26,126,000 tonnes, marginally lower than in the current season (26,183,000). The area devoted to cotton next season is expected to increase modestly. However, yields are pitched to return to a level close to the recent average, rather than the excellent outcomes seen in 2017/18, resulting in the lower figure.
In the United States, the remunerative prices received this year have increased farmers’ enthusiasm for cotton; the National Cotton Council’s Planting Intentions survey implies a modest rise in area, while yields are expected to revert to around the recent average. Abandonment in the major West Texas growing region will as always be a key factor in determining the season’s outcome. During February, rainfall recorded in Lubbock (in the heart of that producing region) was well below average, and virtually no rain at all was received during the previous three months. As a result, production is pitched at 4,505,000 tonnes, just a few percent below the current season.
Production is expected to increase by almost 10 percent in Pakistan, to 1.95 million tonnes, largely due to the reallocation of land to cotton from other crops. A modest rise is also anticipated in India. An announcement in the recent budget proposals that Minimum Support Prices (the point at which the Cotton Corporation of India will step in to purchase local stocks, should market prices fall below it) will be increased has further supported farmers’ intentions. However, it should be noted that these forecasts are based on recent average yields, which have fluctuated in recent years owing to pest attacks and various weather developments, most notably, the timely arrival and adequate distribution of monsoon rains.
The other major change to production is expected in China, where record yields were recorded in principal growing region Xinjiang this year. Output is expected to decline by around six percent, in line with Beijing Cotton Outlook’s figure, to 5,370,000 tonnes. Consumption in China remains a matter of interest with regard to the eventual point at which reserve stocks may be depleted sufficiently that raw cotton imports, which have been limited since 2015, will once again be permitted on a far greater scale. For the time being attention remains focused on this year’s State Reserve auction series, due to begin on March 12. A repeat of the vigorous participation witnessed in 2017 might hasten the point at which a more liberal import policy is adopted. Further forward, continued government support for Xinjiang’s expanding spinning industry, as well as a recent favourable shift in the relationship between Chinese and world prices, should see consumption rise slightly in 2018/19, to 8.8 million tonnes.
Consumption forecasts in the rest of the world are also approached with cautious optimism, though at this early juncture all figures remain subject to the usual caveats regarding unforeseen developments during the season. Further considerable expansion appears in prospect in both Bangladesh and Vietnam, where rises are expected of roughly six and five percent, respectively. In India, mills appear to have recovered from the disruption caused by various policy changes in recent years. A modest rise of three percent is anticipated.
The above calculations give rise to an overall reduction of world stock levels of 583,000 tonnes, against an increase of 160,000 at the end of the current season. An addition of 1.258 million tonnes in the world outside China is expected to be more than offset by a third consecutive, substantial reduction of Chinese stocks, of 1.84 million tonnes.