The August global production demand forecast released by the International Cotton Advisory Committee (ICAC) believes that market fluctuations and U.S. cotton production reductions will have an important impact on the 2022/23 season.
On August 1, the 2022/23 cotton year officially begins. A major factor affecting the new year is US cotton production. Although several cotton-producing areas in the United States have good quality rates, Texas cotton suffers from a severe lack of rainfall and suffers from unusually high temperatures in spring and summer. Almost all dryland fields in western Texas have to be abandoned. Not only that, cotton harvests in irrigated fields in Texas have also begun to be abandoned. Texas accounts for about 40% of U.S. cotton production. If Texas cotton production decreases, it means that the amount of U.S. cotton available for export will decrease. Since the United States has always been the main cotton-producing country and the largest exporter, problems with U.S. cotton production are a global problem. ICAC this month estimates that US cotton production will decrease by 800,000 tons year-on-year, which is directly caused by the reduction in Texas cotton production. If this is the case, US cotton production in 2022/23 will be lower than that in 2011/12.
When the U.S. cotton production is reduced, other cotton-producing countries such as Brazil, Australia, Argentina and West Africa have the potential to increase production to make up for the losses caused by the U.S. cotton production reduction. Although it is too early to tell whether there will be a serious imbalance between supply and demand, the situation in the United States has the potential to cause serious damage to the global cotton supply system.
In addition to supply, several other important conditions include: fluctuations in international cotton prices, global macroeconomic conditions, and the situation in Eastern Europe. Like other commodities, international cotton prices may continue to fluctuate in the new year, but the Kotruk A index and ICE cotton futures have fallen sharply in the past month. The main reason is that the current macroeconomic environment affects the operation of funds, and investors have Feelings of panic. ICAC believes that the previous rise in cotton prices was not supported by fundamentals, so the recent sharp adjustment is not very surprising. As for how cotton prices will develop in 2022/23, as has been the case in recent weeks, the situation in the futures market is more complicated than simply analyzing the fundamental supply and demand situation.
With the recent market talk of a macroeconomic recession, we are in danger of a self-fulfilling prophecy. Whether you agree with Keynesian economics or not, there is no denying that “animal spirits” (consumer sentiment) have the potential to drive markets. Most central bankers believe the strong labor market means the economy will not slip into recession. On the other hand, many large economies have now seen several months of negative growth, and the labor force is also a lagging indicator. It doesn’t matter to some extent whether we are in recession or not, inflation levels are rising around the world and people are getting nervous. The jitters may be enough to slow consumption of discretionary goods including textiles and clothing. If this happens, global demand for cotton could fall from the impressive volumes achieved over the past few seasons.
2022/23 will be a bumpy ride. The direction of cotton prices has been extremely volatile this past year, and predicting cotton prices has become increasingly challenging. Due to excessive price fluctuations, ICAC temporarily stopped issuing price forecasts and will resume price forecasts when conditions are mature. The last time this happened was in 2010/11 when cotton prices hit all-time highs.
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