January 2016 market summary
The year 2016 marks the 50th anniversary of the Cotlook A Index, introduced in 1966, which is widely regarded as a reliable barometer of global raw cotton prices. Cotton Outlook has already received a number of congratulatory messages, which can be found at our website. We would be delighted to receive further congratulatory comments, which can be added at the bottom of that page or sent to firstname.lastname@example.org.
International raw cotton prices during January remained within their by now well-established trading range, but for much of the month fluctuated at the lower end of that range. Having begun the New Year with a value of 69.95 cents per lb, the Cotlook A Index reached a low point of 67.70 on its penultimate trading day.
A flurry of mill buying took place during the early part of the month. Spinners returning from the year-end break had some quite pressing requirements to cover, and the latent demand was unlocked as shippers’ offers declined to reflect the descent of the March contract in New York into the low 60s cents per lb. A range of upland growths, amongst which West African and Brazilian were prominent, encountered unexpectedly strong demand. However, spinners’ focus remained principally on the nearby shipment period – few felt the confidence to anticipate their requirements much beyond the first quarter. As the month progressed, mill enquiry persisted, but with markedly less urgency than during its first week or ten days.
Although cotton futures displayed a certain bias to the downside during January, the market appeared largely unaffected by the negative macro-economic environment (collapsing oil prices, sharp losses on global share markets) that characterised the post-holiday period.
From a fundamental supply and demand perspective, the case could be made for a more positive performance. By the end of the month, Cotton Outlook’s forecast of global production during the 2015/16 season had declined sharply further, mainly as a result of reductions to estimates of output in India, Pakistan and China. Since the initial forecasts for the season were published in February 2015, the global figure has been reduced by no less than 2.6 million tonnes. At just over 21.3 million tonnes, this season’s world production would be the lowest since the 2003/04 season.
Estimates of global consumption have also tended lower during the same period. Whereas our initial forecasts suggested that mill use would expand by 1.4 percent in 2015/16, a net reduction of 1.3 percent is now indicated, to 23.2 million tonnes.
The implied net decline of world stocks of nearly two million tonnes might in other circumstances have sent a clear bullish signal to the market. For the present, however, the aforementioned economic ‘headwinds’, as well as spinners’ dogged adherence to a hand-to-mouth buying policy have combined to restrict any upside potential.
Over half of the estimated reduction in stocks is expected to take place in China, where the government remains in control of a massive stockpile of cotton, estimated at more than eleven million tonnes, accumulated between 2011/12 and 2013/14, when the government procured virtually the entire crop at prices well above current world values. That being the case, during January much conjecture in local and international trade circles centred on official intentions with regard to the sale of cotton from the state reserve, which is expected to be resumed at some point over the next two to three months.
Of particular interest is the pricing policy that Beijing chooses to adopt. In July and August of last year, the government earmarked one million tonnes of state reserve cotton for sale, but succeeded in selling merely 64,000 tonnes. Spinners’ earlier lack of appetite for the supplies in question, attributed to quality considerations and the age of the cotton, has led some observers to suggest that the authorities will be obliged to adopt a more aggressive stance with regard to prices, if inroads are to be made in the huge stocks.
That expectation has no doubt contributed to the bearish mood of China’s domestic raw cotton market, which is reflected in the inverted configuration of the Zhengzhou futures market. It has also appeared to impinge on Chinese import demand for raw cotton. During the course of January, mills received allocations from the 2016 Tariff-rated Quota of 894,000 tonnes of imports on which duty is levied at one percent. A modest upturn in import enquiry resulted, but many spinners appear to have adopted a wait-and-see attitude, pending clarification of the prices at which state reserve cotton may be made available.
Raw cotton imports during December totalled nearly 188,000 tonnes, which brings the total for the first five months of the international statistical season to 434,000 tonnes, against arrivals of 765,000 tonnes during the August/December period a year earlier. To reflect that shortfall, as well as the still subdued nature of current import demand, including that from mills located in free trade zones, who are not constrained by quota requirements, Cotton Outlook’s forecast of China’s imports in 2015/16 was reduced in January to 1.1 million tonnes, which would be the smallest volume since 2002/03, and a fraction of the record imports attained during the 2011/12 campaign.
Attention is beginning, as is customary, to turn to the outlook for cotton plantings in the Northern Hemisphere. Thus far, assessments of farmers’ planting intentions are tentative at best.
Early surveys in China suggest that a further downturn in cotton area is in prospect, both in Xinjiang, where farmers still receive substantial state support, and outside that region, where the subsidy arrangements are now far less generous. The prospects in the United States will move into sharper focus with the release in early February of the results of the National Cotton Council’s Planting Intentions survey.
More broadly, the current level of world prices (just below the long-term, nominal average) may not on the face of it engender great enthusiasm for sowing cotton. However, the strength of the dollar against the currencies of some major producing countries has this season helped to improve returns in local currency terms. It is also the case that prices for some crops that compete with cotton for land have not performed significantly better. Furthermore, it should be born in mind that much of the decline in production that has become apparent in recent months has been attributed either to pest attacks or to adverse weather. More benign growing conditions might be expected to result in a recovery of average yields during the growing season ahead. Cotton Outlook’s initial forecasts of both production and consumption in 2016/17 will be published at the end of February.