October 2017 Market Summary
International cotton prices traded within a narrow range during most of October, before advancing sharply late in the period and then drifting lower to end only modestly firmer on the month. The Cotlook A Index advanced to a high point of 80.40 US cents per lb, CFR Far East, on October 24, and ended at 79.55. The spike in prices was influenced partly by an announcement from the state government of Gujarat in India that farmers in that major producing state will be paid a bonus on top of the Minimum Support Price (the level at which the Indian Cotton Corporation will intervene to purchase local stocks should local seed cotton prices fall below it). Some concern was also in evidence for the US crop owing to freezing temperatures in the major growing state of Texas, however, the impact is thought to have been limited and a bumper crop remains in prospect.
Mill buying activity has remained fairly routine, with spinners tending to cover their nearby requirements during price dips, whereas forward and volume business has been scarce. The sharp rise in ICE futures provided an opportunity for some trade buying at origin, but a bearish mood still prevails among most market observers, influenced mainly by the fundamental position (which continues to imply a production surplus). However, basis levels held steady for the most part throughout October, and most mills appeared content to wait for the anticipated pressure of new crop harvests to weigh on prices.
Increased selling pressure from India, where a bumper crop is in prospect, had for some time been considered the most likely catalyst for a further downturn in world prices. Just as local prices showed signs of weakening under the impending weight of the harvest, however, the above-mentioned announcement regarding Minimum Support Price operations pushed asking prices for that origin well beyond the levels mills in export markets are willing to meet. Although domestic prices have subsequently lost ground, India’s presence in the international market remains for the time being very muted.
In contrast, US export commitments remained robust during the period under review, and in the week ended October 19 posted their highest weekly sales figure of the season so far. Some recent sales are thought to have been facilitated by face-to-face meetings at the International Cotton Association’s annual trade event, held this year in Singapore on October 12 and 13. Total upland and Pima commitments by October 26 had risen had risen to 8.69 million running bales, equivalent to 62 percent of USDA’s export projection for the season (14.5 million bales of 480 lbs). A further upward adjustment therefore cannot be ruled out, should the sales continue at their recent pace.
Washington’s October supply and demand report took account of the damage inflicted by various hurricanes and weather events over the US cotton belt in recent months, and a reduction was therefore not unexpected. USDA lowered its number to 4.597 million tonnes (21.12 million bales of 480 lbs), a figure that is still considered optimistic by some observers, owing to cold temperatures during the month that may have impacted yield. However, it seems unlikely that recent weather events will dent the crop to a significant enough degree to preclude the largest production figure since 2006/07; Cotlook’s number was held unchanged in October, at 4.507 million tonnes (20.7 million bales).
It remains to be seen how much of a dent lower production and increased exports might make in this season’s US ending stocks. The carryover at end of July 2018 was projected by USDA in October at 5.8 million bales (480 lbs), against a beginning stock of 2.75 million. That would be the largest carryover recorded since the 2008/09 season.
The major changes to our assessment of global production during the month concerned increases for China, India and Brazil, and a reduction for Pakistan. In the last-mentioned origin, differing field reports and mention of pest infestations prompted a downward adjustment, to 1.9 million tonnes, though that figure still represents a considerable increase on the previous season.
In China, persistently positive crop reports resulted in an increase, to 5.4 million tonnes, while in India, the delayed withdrawal of the Southwest Monsoon failed to dent optimism, and a crop in the region of 6.63 million tonnes is forecast by Cotlook, up from 6.545 in September.
In the Southern Hemisphere, expectation of Brazilian output was increased, despite the sowing of that crop being some way in the future. Growers’ enthusiasm was boosted by the excellent yields and good monetary returns from the 2016/17 crop, and at this early juncture a considerable portion of land is expected to be switched into cotton from other crops. Cotlook’s estimate stands at 1.7 million tonnes, a figure still deemed conservative by some other forecasting bodies. When considered together, the effect of these changes is that season-on-season production growth is pitched at almost 14 percent, with production of more than 26 million tonnes for the first time since 2012/13.
On the consumption front, the figure for China was again increased, owing to further confirmation of expansion in capacity and rising demand for textiles in the local market. The other notable change was in Brazil, where a recovering economy and reports of increased mill activity prompted an upward adjustment. Significant retrospective changes were also made to our assessment of consumption in the previous season, mainly owing to changes in China, which resulted in lower beginning stocks in 2017/18.
As a result of the above adjustments, an addition to global stock levels of over 840,000 tonnes therefore appears in prospect at the end of 2017/18, up modestly from the 800,000 put forward a month earlier. However, as has been the case for some time, a considerable reduction to stocks in China (of almost 1.6 million tonnes) disguises the situation in the ‘rest of the world’, where an addition in excess of 2.4 million tonnes is foreseen.