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Cotton Prices Retreat as Global Production Rises and Demand Uncertainties Persist

Benchmark cotton prices have retreated over the past month, with most contracts experiencing a decline, according to a report published last week by Cotton Incorporated. While a surge in prices during the second half of May offered a brief respite, the overall trend suggests downward pressure as global production is poised to increase and demand uncertainties linger.

Relative to one month ago, the soon-to-expire July NY/ICE futures contract dropped from 77 to 72 cents/lb, while the December NY/ICE futures contract fell from 75 to 72 cents/lb. Both contracts experienced rallies in the second half of May, reaching highs of 82 cents/lb and 79 cents/lb, respectively.

The A Index also declined, easing from 86 to 83 cents/lb over the past month, while the Chinese Cotton Index (CC Index 3128B) moved slightly lower, falling from 104 to 102 cents/lb in international terms.

Global Supply and Demand: Increased Production and Uncertain Demand

The latest USDA report suggests a rise in global cotton production and mill use for the upcoming 2024/25 marketing year, with projected increases in production for the United States, Brazil, and Turkey.

"The largest year-over-year increase in production is forecast for the U.S., where the crop is projected to grow +3.9 million bales (to 16.0 million)," the report states.

However, while global production is expected to increase, the report highlights the uncertainty surrounding global demand, particularly for China, which was a significant driver of import demand in the 2023/24 marketing year.

"It remains to be seen how much fiber accumulated in 2023/24 will be leveraged against imports in 2024/25, but the potential for China to pull back on imports at the same time that exportable supplies are expected to rise may weigh on the market," the report notes.

Economic Outlook: Signs of Stability but Uncertainty Remains

The report acknowledges the impact of inflation and rising interest rates on global economies. While a recession was initially feared, the IMF predicts modest growth for major consumer markets like the US and Europe. This suggests that demand for downstream goods, including apparel, could stabilize.

"The shock of inflation and sharply higher interest rates has been registered, and economies around the world have had the opportunity to digest these changes," the report states.

However, the report also acknowledges that geopolitical uncertainties and elevated interest rates could hinder a rapid recovery in demand.

Price Outlook: Potential for a Bottom and Gradual Recovery

The current pullback in cotton prices could mark the beginning of a more definitive bottom in the market, which could eventually lead to increased buying interest as spinning mills see less room for further price declines and more potential for future price increases.

"An improvement in buying interest appears embedded in USDA projections, with all the world’s top spinning countries expected to consume more fiber in 2024/25," the report states.