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May 2015
Monthly Economic Letter

RECENT PRICE MOVEMENT

After trending higher from mid-March through the end of April, values for NY futures and the A Index turned lower in May. Chinese prices have been stable, while Indian and Pakistani prices increased.

  • Prices for the nearby July contract (NY futures) met resistance near 68 cents/lb in late April and have retreated to levels near 65 cents/lb.
  • The A Index also reversed direction in the first two weeks of May, with values declining from levels near 75 cents/lb to those near 72 cents/lb.
  • The CC Index was steady near 98 cents/lb (13,400 RMB/ton).
  • Indian spot prices (Shankar-6) increased slightly. In international terms, values climbed from 67-68 cents/lb (33,500 INR/candy) a month ago to levels near 71 cents/lb recently (35,500 INR/candy).
  • Pakistani spot prices rose from 62 to 64 cents/lb (5,200 to 5,400 PKR/maund).

SUPPLY, DEMAND, & TRADE

In their May report, the USDA releases their first complete set of estimates for an upcoming crop year. The projection for world production in 2015/16 is 111.3 million bales, which represents an 8.0 million bale decrease (-6.7%) relative to the 119.3 million bales harvested in 2014/15. The forecast for world mill-use in 2015/16 is 115.3 million bales, which represents a 3.8 million bale increase (+3.4%) relative to the 111.5 million bales consumed in 2014/15.

In combination, the smaller crop and the increase in use are expected to result in the first production deficit in six crop years. This implies a decrease in ending stocks, and the estimated decline in warehoused supplies is 4.0 million bales. However, global ending stocks have set a series of successive records over the last four crop years, and there should be little concern of shortage. The 106.3 million bales expected to be sitting in the world’s warehouses at the end of the 2015/16 crop year are more than 70% higher than the average between 2004/05 and 2008/09 (62.1 million bales). Due to what was considered a massive volume of supply during the 2004/05-2008/09 time period, the A Index averaged only 60 cents/lb over those five years.

At the country-level, India is expected to emerge as the world’s largest producer in 2015/16. Previous forecasts for 2014/15 suggested that India would surpass China in the current crop year. However, the slow pace of arrivals led to a series of downward revisions to the Indian harvest figure and pulled recent estimates for Indian production in 2014/15 to a level equal to that for China (30.0 million bales). Reform to government support measures for cotton growers in China is expected to pull Chinese production down by 3.0 million bales in 2015/16. Meanwhile, lower cotton prices are anticipated to result in a decrease of only 500,000 bales in India.

Outside of China and India, notable year-over-year decreases are expected in virtually every major cotton producing country, including the U.S. (-1.8 million bales, from 16.3 million to 14.5 million), Pakistan (-600,000 bales, from 10.6 million to 10.0 million), Turkey (-400,000 bales, from 3.2 million to 2.8 million), the African Franc Zone (-330,000, from 4.6 million to 4.2 million), Mexico (-316,000 bales, from 1.4 million to 1.0 million), and Brazil (-250,000 bales, from 7.0 million to 6.8 million).

While lower cotton prices can discourage planting, they can also encourage consumption. In terms of mill-use, the largest year-overyear increases are expected to occur in India and China. Indian milluse is projected to rise 1.3 million bales (from 24.5 million to 25.8 million). Chinese mill-use is projected to increase 1.0 million bales (from 35.0 million to 36.0 million). Other notable increases year-overyear are forecast for Pakistan (+350,000 bales, from 10.8 million to 11.1 million), Bangladesh (+250,000, from 4.5 million to 4.7 million), Vietnam (+250,000, from 3.9 million to 4.0 million), and the United States (+150,000 bales, from 3.7 million to 3.8 million).

PRICE OUTLOOK

.Government policy, and its effects on trade flows, has been influential on global price direction for the past several crop years. During the recent period of aggressive reserve purchases (2011/12- 2013/14), elevated Chinese import demand supported prices internationally. With reforms that eliminated government purchases as a means of price support in 2014/15, Chinese imports fell sharply. Since China is the world’s largest importer (45% of world imports between 2011/12-2013/14), the corresponding reduction in global demand was a factor that allowed stocks to rise in many exporting countries, which put downward pressure on prices everywhere.

In 2015/16, Chinese import demand is expected to weaken further, and to drop from 7.7 million bales to 6.0 million (-22%). This volume is less than one third of the average between 2011/12-2013/14 (19.7 million bales). In terms of the effect on ending stocks in exporting countries, limited Chinese import demand should serve as a counterbalance relative to decreases in acreage and production.

Ending stocks in the U.S., the world’s largest exporter, are projected to be stable at 4.4 million bales. However, this volume is 80% higher than the level carried forward from 2013/14. Ending stocks in India, the world’s second largest exporter, are expected to decrease slightly (- 300,000 bales) in 2015/16, but that decline is relative to a record-setting 14.3 million bales in the current season. Along with weak import demand resulting from China’s pullback from the world market, the volume of exportable supplies should make it difficult for prices to advance in the coming crop year.

May 2015 – Monthly Economic Letter

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