Traditional relationships among cotton benchmarks flipped in recent months. According to Nasdaq, cotton price was $1.0524/lb on 15 September and the month closes with $0.8534/lb.
Indian spot prices (Shankar-6 quality), which traditionally trade near NY/ICE futures (December currently at 105 cents/lb), have been the highest benchmark since late June (currently near 143 cents/lb).
The decline in Chinese prices relative to those from the rest of the world may affect trade in the new crop year. China is normally the world’s largest importer of both cotton fiber and yarn.
Last crop year, Chinese gins aggressively purchased seed cotton at elevated prices. Disagreements about downstream prices prevented much of that fiber from flowing to spinning mills. A result was the record accumulation of private (non-reserve) stocks.
Those supplies are a likely factor weighing on the Chinese market. The U.S. ban on sourcing from Xinjiang is another potential contributor, but with Chinese prices lower than those in other markets, Chinese inventories could be drawn down while imports of fiber and yarn could fall.
When China drew down its reserve stocks (2015/16-2018/19), Chinese imports fell as low as 4.4 million bales (2015/16). Since then, China has imported as much as 12.9 million bales (2020/21). China brought in 7.8 million bales in 2021/22 and is forecast to import 9.0 million bales in 2022/23. The U.S. crop is forecast to be 3.7 million bales lower year-over-year in 2022/23. If China were to return to import volumes near 2015/16 levels, it could erase the tightness in exportable supply stemming from a smaller U.S. crop.
Chinese yarn imports, which also involve competition between domestic and international fiber prices, have already fallen. In the latest available data (July 2022), shipments were down -41% year-over-year, dropping to the lowest monthly volume in ten years (since 2012). China sources much of its yarn from Vietnam (48% share during the 2021/22 crop year), and a possible consequence of lower Chinese yarn import demand could be lower fiber import demand from Vietnam (world’s third largest destination).
Other demand-side concerns include another lockdown in a major Chinese population center, surging energy costs in Europe, and renewed indications from Federal Reserve officials that the central bank is prepared to continue to increase interest rates. The U.S., the E.U., and China represent the world’s largest consumer markets for finished cotton goods, and none of these developments are supportive of downstream demand.
These demand-side concerns flared simultaneously with the flooding in Pakistan (Pakistani spot prices increased from 102 to as much as 127 cents/lb by the end of August) and were likely reasons why prices decreased sharply that week.
When paired with a potential pullback in Chinese fiber and yarn imports, downstream concerns could more than offset tightness in exportable supply. However, recent market volatility underlines uncertainty in the market. Volatility could continue as the market struggles to balance exportable stocks against headwinds for demand.
*Source: Cotton Incorporated
