After two months of range-bound trading, cotton prices shifted lower in late November. The March New York futures contract fell through important support near 94 cents/lb and briefly dropped below 88 cents/lb before appearing to have established a new range between 90 and 94 cents/lb.  An Index values also declined and fell below 100 cents/lb for the first time since September 2010.  The recent move downward coincided with mounting uncertainty regarding the global economic environment which pushed a range of commodity prices lower. The recent rebound in stock prices that accompanied announcements of coordinated efforts to support Europe failed to generate a similar positive reaction in commodity prices.

 

Fiber demand continues to be widely reported as weak, and an absence of mill-related buying allowed prices to decline. While mill demand remains weak, the Chinese reserve system has been an active buyer. To date, the Chinese government has purchased 6.3 million bales of Chinese cotton and is believed to have been behind 2.5 million bales of U.S. cotton reported as sold to China in recent export sales data. Data regarding potential Chinese purchases from other origins are not available, but the sum of domestic and U.S. purchases alone already totals 8.8 million bales. With this cotton being withheld from the market, Chinese government purchases likely have served as a mitigating force counteracting some of the downward pressure put on prices by the combination of a record global harvest and weak mill demand. 

 

The USDA signaled this downward pressure may be greater than previously estimated, increasing their forecast surplus of production relative to consumption by 2.5 million bales. At 12.1 million bales, the current production surplus projection for 2011/12 is the third largest on record, behind only 2004/05 (12.5 million bales) and 1984/85 (17.9 million bales). Responsible for this month’s increase in the size of the expected surplus was a relatively stable world production figure, which declined only 468,000 bales from 123.9 million to 123.4 million, combined with a 2.9 million bale reduction to the world consumption estimate that lowered the previous projection of 114.3 million bales to 111.3 million. These revisions lifted the stocks-to-use ratio from 48.1% to 51.8%, the highest level since 2008/09.

 

The only notable country-level contribution to the change in the global production figure was a 473,000 bale decrease in the size of the expected U.S. harvest. The current U.S. production forecast is 15.8 million bales. Country-level revisions on the consumption side of the balance sheet were widespread. Among the top eight cotton consuming countries, only Pakistan did not see a decline of more than 100,000 bales to 2011/12 estimates. The 1.0 million bale revision for India was the largest. Reductions for other major consuming countries included those for China               (-500,000 bales), Turkey (-500,000), Brazil (-100,000), Bangladesh (-150,000), the United States (-200,000), and Indonesia (-200,000).

 

Given current weakness in demand, a question facing cotton markets is to what extent Chinese government purchases may be able to support world prices in coming months. The 8.8 million bales known to have already been purchased represent 73% of the 12.1 million bale production surplus estimate, implying that only 3.3 million bales of the 2011/12 production surplus should be weighing on world prices. Nonetheless, with global mill demand weak, it may be difficult for the Chinese government to uphold world prices, especially as countries with limited warehousing capability like India conclude harvesting and try to move increasing amounts of fiber into the international market.

 

The decline in cotton prices over the last nine months has made planting cotton less attractive relative to prices for other crops. As a result, a decrease in cotton acreage could be expected for the 2012/13 harvest. In the first set of figures released by a major estimating organization for the upcoming crop year, the International Cotton Advisory Committee (ICAC) forecast an 8% reduction in world planted acreage. Assuming a slight increase in yield, the ICAC expects a 6% reduction in world cotton production next crop year.  More difficult questions, however, are related to the demand side of the balance sheet. The ICAC forecasts a 3% increase in consumption, which would imply production would be roughly equal to consumption, but with persistently weak macroeconomic conditions in traditional end-use markets there is a considerable amount of demand-related uncertainty.