Recently, the cotton futures 2401 contract has oscillated in the range of 17,000-17,500 yuan/ton. Although the U.S. Department of Agriculture’s (UDSA) August supply and demand report was more positive than expected, it was difficult to defeat the sluggish macroeconomic sentiment, and cotton prices continued to be suppressed upward.
USDA August report focuses on reducing US cotton production
According to the U.S. Department of Agriculture’s August supply and demand report, global cotton production will decrease by 593,000 tons in 2023/2024 due to the resurgence of drought in the United States and extreme high temperatures in Uzbekistan. In terms of consumption, it is expected that my country and Turkey’s consumption will increase in 2023/2024, and global cotton consumption will increase by 107,000 tons overall. Import and export trade flows have increased, and the final ending inventory is expected to decrease by 640,000 tons.
Looking at the USDA supply and demand report for August, the key adjustments are all in US cotton production, and there are no significant adjustments in other countries. In addition, the yield is reduced by 6.23%, mainly due to the decrease in yield and the increase in the abandonment rate caused by the drought in Texas. The forecast cotton production in the United States for 2023/2024 has been significantly reduced by 546,000 tons, a decrease of 15.2% from the July forecast.
The drought index in Texas in the United States began to reverse in late June, continued for a month, exceeded the average level of the past five years in late July, and continued to rise after entering August. As of August 8, the drought index reached 198, an increase of 26.9% from the previous week. Considering that the Texas drought index has rebounded and lasted for more than one month, it is relatively reasonable to adjust production in the USDA August supply and demand report, but the adjustment magnitude exceeds market expectations. The Texas Drought Index needs to be continuously observed in the later period. If the drought is alleviated, it is not ruled out that the US cotton production will be revised again.
In terms of U.S. cotton exports, due to the decrease in U.S. cotton production and the increased substitution of Brazil and Australia, the report lowered the export volume by 272,000 tons. In addition, consumption was slightly reduced, and the final inventory was reduced by 152,000 tons. The overall report is bullish.
my country’s output has not seen significant adjustments
For the 2023/2024 year, USDA’s August supply and demand report did not adjust my country’s cotton production, increasing imports by 54,000 tons, and increasing consumption by 109,000 tons. After the opening inventory was reduced, the overall ending inventory was reduced by 191,000 tons. For the new year, The impact is more neutral. At the same time, according to the latest output forecast released by the BCO production survey, there has been no adjustment to my country’s Xinjiang cotton output for the time being, with an estimate of 5.572 million tons.
From April to May, severe weather such as low temperatures and hail occurred in Xinjiang. The impact of reduced cotton production has been fully priced in by the market, and it is generally accepted that Xinjiang’s cotton production is forecast to be 5.5 million tons. Therefore, currently only unexpected increases or decreases will affect the market.
Judging from recent field surveys in Xinjiang, Xinjiang’s high temperature weather has made up for the impact of early low temperature delays. At the same time, Xinjiang has sufficient water resources this year, which has also timely alleviated the negative impact of high temperature weather on cotton growth. The cotton yield per unit area is 450-500 kg/mu, and the expected output in the later period is likely to be more than 5.5 million tons.
Although the USDA report was more positive than expected, it was difficult to beat the sluggish macro sentiment. On the external front, U.S. debt issuance peaked and external interest rates continued to rise. Against the backdrop of the widening interest rate gap between China and the United States, capital flowed northward, which indirectly led to the downturn in the domestic capital market.
The picture shows the seasonal trend of cotton commercial stocks (unit: 10,000 tons)
Overall, the fundamentals are relatively strong. When the peak season arrives, the space below cotton prices is limited. However, the macro sentiment has not improved yet, which may further suppress the market momentum. Therefore, short-term cotton prices present a dilemma, with mainly narrow range oscillations.
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