U.S. Cotton Inc.’s monthly analysis believes that the cotton market has been caught between two opposing factors over the past few months.
Currently, the global macroeconomic situation is deteriorating. At the end of July, the International Monetary Fund (IMF) predicted that the global economy would grow by 3.2% and 2.9% in 2022 and 2023 respectively, significantly lower than the 4.4% and 3.8% forecast in January, and the 3.6% and 3.6% in April. Macroeconomic evolution may have been a factor in a shift in investors’ outlook on the commodities sector, causing prices for cotton and other commodities to plummet in June and July, following a string of other commodities.
At the same time, factors related to the cotton supply chain may affect demand in 2022/23. The downstream cotton consumer market is not as demanding as food, energy and accommodation, and these consumer categories have experienced the most severe effects of inflation. Given rising prices for necessities, consumers are likely to have less money to spend on clothing and home furnishings.
U.S. consumer spending on apparel has been flat over the past year, but has remained 25% higher than in 2019. If U.S. consumers stop buying clothing, it could hit the cotton market in the same way that the shipping crisis posed a huge challenge to retailers. In terms of weight, in the first half of 2022, U.S. cotton apparel imports increased by 22% year-on-year. Compared with 2019 (before the epidemic), sales in the first half of 2022 increased by 23%. Given strong import volumes, inventories could build at both retail and higher up the supply chain if consumer demand declines. This could lead to the cancellation of contracts, which is ultimately reflected in cotton consumption levels, and contracts signed at prices above current value may be particularly vulnerable.
On the other hand, the tight supply of cotton in the United States has provided huge support to the market. Although cotton is drought tolerant, it also needs adequate moisture. There has been very little rainfall in western Texas over the past year, and drought conditions have been extreme. As a result, discard rates are expected to rise significantly. Just how low U.S. cotton production will be remains to be seen, but the USDA’s current forecast predicts only 12.6 million bales in 2022/23, which is far lower than market expectations of 14.75 million bales and 500 million less than in 2021/22. Thousands of packages.
Meanwhile, demand for U.S. cotton has been relatively stable, at nearly 18 million bales over the past five years (an average of 15.5 million bales exported and 2.7 million bales used by domestic mills). Exports of just 12.6 million bales were well below recent averages. Before the 2022/23 season, U.S. ending stocks were close to multi-decade lows, indicating that the United States may have to control cotton exports in the 2022/23 season. If cotton is not readily available from other sources, a shortage of U.S. supplies could support global prices.
At the same time, there is weakness on the demand side. In recent months, the market has struggled to find a balance between a weak demand environment and limited export supplies. The conflict between these two influences makes it difficult to determine a clear direction for prices, which may continue to fluctuate.
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