Cotton futures may struggle to achieve gains despite US officials - in their first full estimates for 2020-21 - seeing world inventories of the fibre fall to a nine-year low, helped by a decline in US inventories.
The US Department of Agriculture, in its first estimates for next season, as starts in August, forecast global stockpiles shrinking by 1.7m bales to 79.4m bales, the lowest since 2011-12.
The forecast, on Friday, reflected expectations of a return by consumption to growth for the first time in two years, on an improved economic outlook, and a fall in production of 2.8m bales to a four-year low of 118.5m bales.
This included assessments of weaker harvests in Brazil and India, and of a 600,000-bale decline to 19.50m bales in output in the US - where crop prospects, as the leading importer and the only origin deliverable against benchmark New York futures, are particularly closely watched by investors.
The USDA factored in a sowings estimate of 12.5m acres – some 500,000 acres below a National Cotton Council estimate released less than a week before, which had pegged cotton output at 19.8m bales.
Nonetheless, with US cotton production this year still seen relatively high – the trailing five-year average harvest is 17.9m bales – and the USDA forecasting a drawdown of only 100,000 bales to 5.30m bales in the country’s stocks over 2020-21, the US data were termed “not bullish” by Louis Rose at Rose Commodity Group.
And this assumes that the US officials prove correct in foreseeing a sharp acreage reduction, which Mr Rose doubted, saying that “we think that the USDA projection could prove to be around 1m acres light”.
He termed as “the most supportive projection” for prices among the USDA’s data slew the forecast for growth of 2.0m bales to 121.2m bales expected in world cotton consumption in 2020-21.
This appeared to be “a viable projection, even as USDA has tended to overestimate consumption for recent marketing years”.
Plexus Cotton, meanwhile, highlighted the outstanding threat to values of cotton, and other assets, from coronavirus, or Covid-19, saying that “we feel that financial markets are currently mispricing the risk associated with this epidemic and its economic fallout.
“While the virus may not be as deadly as initially feared, it is quite contagious and millions of people are changing their behaviour because of it, either voluntarily or because authorities force them to.
“This will almost certainly lead to reduced economic activity,” Plexus said, adding that for cotton “even though the market has been channelling higher since the beginning of February, we see no reason for prices to move much higher from current levels”.
Furthermore, potential for price “upside seems limited by the large amount of unsold cotton in India, which should keep a lid on [New York futures] prices at around 70-71 cents a pound”,
That said the trading house stated too that “the market looks well supported at 67 cents”, adding that “unless the virus situation escalates, we see currently no reason for this support to cave in.”
Brokerage Varner, meanwhile, said that “cotton is fairly priced”.
New York cotton futures for May closed on Friday at 69.00 cents a pound.
Cotton vs corn
The USDA said that its cotton outlook “assumes that the negative economic impact of the Covid-19 outbreak is relatively small and affects only marketing year 2019-20”, as ends in July.
In fact, for 2020-21 the department forecast that “China’s consumption is projected to increase slightly due to recovery from the impacts of the Covid-19 outbreak,” besides from “reduced US-China trade tensions”.
China is the top cotton consumer, with use forecast rising by 1.0m bales to 38.7m bales next season.
On its forecast for a fall of 1.24m acres in US cotton sowings this year, the USDA flagged the underperformance of forecast harvest prices of the fibre compared with those of a corn and soybeans, a relationship which “has played a key role” in influencing planted area.
“Cotton futures prices from mid-January through mid-February averaged 4 cents (nearly 5.5%) below price expectations in early 2019.
“For the same period, price declines for corn (-1.5%) and soybeans (-2.5%) were smaller, indicating that alternative crops are relatively more competitive this year.”