July 2017 Market Summary
International offering rates fluctuated within a narrow range during July, influenced by a lack of impetus in ICE futures. The A Index began the period at 84.55 US cents per lb, falling mid-month to its low point of 82.20 cents (the weakest since January), before recovering to close at 84.90 cents per lb.
The last trading day of July marks the end of the 2016/17 international cotton season, during which the Index has fluctuated within a range of 19.90 cents (the low was recorded in early September and the high in mid-May). However, Index ended the season just two cents removed from its opening level, at 85.00 US cents per lb. The average for the period was 82.76 cents per lb, compared with 70.39 the previous season.
Under the Dual Index System, the 2016/17 A Index expired at the end of July, to be replaced by the erstwhile Forward (2017/18) Index, which will stand alone until after the end of the year; a new Forward Index (shipment no earlier than October/November 2018) will be introduced as soon as sufficient market evidence is available. On the last day of the 2016/17 season, the Forward Index was displaying a discount of almost 600 cent points in relation to nearby prices.
Market activity was firmly in the summer doldrums throughout most of July, despite the perception that some spinners had requirements still to cover prior to the arrival of Northern Hemisphere crops. Sourcing cotton for nearby delivery was increasingly difficult and the already tight supply position confined most spinners to sporadic covering of nearby requirements, at firm basis levels, particularly for African Franc Zone remnants. Brazilian cotton continued to be offered, though shipment any earlier than October became more difficult to secure. The Australian crop is well sold from origin and the volume in trade hands was depleted during July, to the extent that shippers were no longer keen sellers by the end of the period.
In July’s USDA supply and demand report, the Department maintained its projection of US exports in 2017/18, at 13.5 million 480 lb bales (one million bales lower than the figure for 2016/17). US shippers continued to add to their already impressive commitments for shipment during the new season, which accounted for nearly 40 percent of the USDA’s projection by July 20. [The major destinations to that date were China, Vietnam and Mexico, which together account for over 50 percent of the total.] The result was that, by July, US cotton for shipment even in the fourth quarter was becoming scarce and some shippers were reluctant to offer for delivery any earlier than the turn of the year.
In China, State Reserve auctions continued to attract good participation through most of the month. However, on July 24 an announcement confirming that an additional 414,000 tonnes of Xinjiang cotton (considered more desirable than ‘mainland’ lots) would be made available for sale prompted a less urgent approach to procurement; the percentage sold each day had retreated below 50 percent by the end of the month.
The addition of a further tranche of Xinjiang cotton, in an effort to allow smooth transition between the seasons, engendered rumours that, as occurred last year, the auction series would be extended beyond its official end on August 31 (perhaps to the end of the following month).
Cotlook’s estimate of Chinese production in 2017/18 was revised upwards in July, by 260,000 tonnes, reflecting the perception that yields will be good and plants are developing under generally favourable conditions.
Other changes to Cotton Outlook’s assessment of global supply and demand were informed by the progress of planting and crop development in major producing countries during July. In the United States, the Planted Acreage report, released in late June, was modestly lower than the March Prospective Plantings forecast. Weather events during recent months have heightened the perception that abandonment in Texas may be higher than was earlier anticipated. Cotlook’s figure was reduced to 4,072,000 tonnes, though it should be noted that Washington’s August report, the first of the season based on actual field surveys, may provide a clearer picture of the outlook.
Smaller adjustments were made for some other countries including an upward revision for certain African Franc Zone suppliers (which enjoyed a successful marketing campaign in 2016), owing mainly to the expectation of a larger final planted area. Brazil and Argentina also saw increases to their production figures at this very early juncture, encouraged by the good productivity obtained from the 2016/17 crops, and good returns, relative to competing crops.
In India, extremely heavy rainfall in major producing state Gujarat caused flooding and prompted some concern among observers late in the month. However, on a national scale, the outlook remained positive, and by the end of July sowing data indicated that cotton had been planted on an area some 20 percent higher than the corresponding date in 2016, and just five percent shy of Cotlook’s projection for the new season. The figure for that country remained unchanged from our June assessment, as did the figure for Pakistan, where final sowing is roughly 14 percent ahead of the previous year.
Changes made to consumption figures in Cotlook’s July assessment primarily concerned China, Vietnam and Pakistan, which saw increases of 100,000 and 75,000 tonnes, and a reduction of 75,000 tonnes, respectively. World consumption in 2017/18 is forecast at 24,671,000 tonnes, reflecting season-on-season growth of 2.4 percent.
A modest addition to global stock levels of 282,000 tonnes therefore appears in prospect at the end of 2017/18, though that figure belies the disparity between the situation in China and that in the rest of the world.
Inside China, a considerable reduction is still anticipated, of over 1.8 million tonnes, owing entirely to stock disposed of through State Reserve channels. Outside that country, our figures continue to imply an addition that will more than offset the Chinese reduction, resulting in an addition to ‘rest of world’ stocks of more than two million tonnes.