RECENT PRICE MOVEMENT

Most benchmark prices decreased over the past month.

• The May NY futures contract declined from values near 79 cents/lb a month ago to those below 75 cents/lb recently.
• As the May contract has approached expiration, the July contract has picked up a larger share of open interest. Prices for the July contract have been consistently trading at a higher level than those for May, but July futures also lost ground over the past month, falling from levels near 80 cents/lb to those around 76 cent/lb.As the May contract has approached expiration, the July contract has picked up a larger share of open interest. Prices for the July contract have been consistently trading at a higher level than those for May, but July futures also lost ground over the past month, falling from levels near 80 cents/lb to those around 76 cent/lb.
• The A Index also declined several cents over the past month, dropping from levels over 88 cents/lb to those below 85 cents/lb.
• The China Cotton (CC) Index has been comparatively stable, holding to levels around 104 cents/lb in international terms or around 15,900 RMB/ton in domestic terms.
• After declining throughout much of March, Chinese futures have been flat to slightly higher in early April. Values for the most actively traded September ZCE futures contract have been near 15,500 RMB/ton recently, after falling from levels over 16,600 RMB in early March.
• Due in part to a strengthening rupee, values for the Indian Shankar-6 variety increased in international terms over the past month, rising from 83 cents/lb to 85 cents/lb. In domestic terms, values were flat to lower, generally holding to levels between 43,000 and 44,000 INR/maund.
• Pakistani prices were stable. In international terms, values held near 78 cents/lb. In domestic terms, values held near 6,750 PKR/candy.

SUPPLY, DEMAND, & TRADE

This month's USDA report featured slight increases to world production and mill-use.

The global harvest estimate was lifted 585,000 bales (from 105.7 to 106.3 million). The increase at the world-level was primarily a result of larger crop estimates in China (+250,000 bales, from 22.5 to 22.8 million) and Brazil (+200,000 bales, from 6.5 million to 6.7 million) outweighing a decrease in the forecast for Australia (-100,000 bales, from 4.5 to 4.4 million).

The global mill-use figure was increased 161,000 bales, from 112.4 to 112.6 million. At the country-level, the largest revisions included those for Uzbekistan (+150,000 bales, from 1.6 to 1.7 million), Pakistan (+100,000 bales, from 10.2 to 10.3 million), Thailand (+100,000 bales, from 1.2 to 1.3 million), and Bangladesh (-200,000, from 6.7 to 6.5 million).

With the increase in global production larger than the increase in mill-use, world ending stocks are projected to be higher than they were a month ago (+400,000 bales, from 90.5 to 90.9 million). A portion of this additional supply is expected to originate in China (+250,000 bales, from 48.9 to 49.1 million), but estimates for ending stocks were also revised higher in a range of exporting countries, including India (+600,000 bales, from 11.9 to 12.5 million), Brazil (+225,000, from 7.0 to 7.2 million), and Australia (+100,000 bales, from 2.4 to 2.5 million).

These additions to exporter ending stocks are not a result of a decline in projected global trade, with the estimate for global imports mostly unchanged this month (+141,000, 35.9 to 36.1 million), but are instead driven by a loss of market share relative to the U.S. Due to very strong export sales data in recent weeks, the U.S. export forecast was increased 800,000 bales (from 13.2 to 14.0 million). The current projection indicates that shipments from the U.S. in 2016/17 will be the fourth highest on record (14.4 million bales in both 2004/05 and 2010/11, 17.7 million bales in 2005/06) and is a major increase (+52%) relative to last crop year, when U.S. exports totaled only 9.2 million bales.

With this month's addition, the magnitude of the increase in U.S. exports (+4.8 million bales versus 2015/16) currently exceeds the size of this year's large increase in the U.S. harvest (+4.3 million bales versus 2015/16).A decrease in mill-use and an increase in beginning stocks are mitigating factors, but U.S. stocks are now forecast to contract slightly this crop year (-100,000 bales, from 3.8 to 3.7 million bales). This represents a significant change relative to previous USDA estimates. As recently as February, U.S. stocks were projected to increase by one million bales in 2016/17.

PRICE OUTLOOK

Whether or not the U.S. will be able to maintain a high level of exports will be an important factor shaping price direction in the upcoming 2017/18 crop year. The USDA released an updated set of acreage forecasts in the Prospective Plantings Report at the end of March. This report suggested that U.S. cotton acreage will rise by more than 20% for the 2017/18 season. The weather, through its influence on yield and abandonment, will determine the extent to which the expected increase in U.S. planting might correspond to an increase in production. Nonetheless, an increase of planting on this scale suggests that the prospect of a large U.S. harvest is certainly possible next crop year.

The southern hemisphere will be collecting a bigger harvest this summer, which should mean more competition for U.S. exports in coming months. In addition, the tightening of supply on the Indian sub-continent last spring/summer and the currency-related reforms in India that affected the uptake of fiber from Indian farms to traders this season should not be repeated. This may make Indian cotton more of a feature in international markets throughout 2017/18. The degree to which these factors may influence demand for U.S. exports will help determine how large an increase in ending stocks the U.S. may or may not have next crop year. Given the U.S. position as the world's largest exporter, the eventual size of the change in U.S. ending stocks can be expected to influence price direction around the world.