Cotton Prices Under Pressure as Global Supply Increases and Chinese Demand Cools

Cotton prices have experienced a notable decline in recent weeks, with all benchmark prices dropping across the board, as concerns shift from supply shortages to the potential for a surplus in the 2024/25 marketing year, according to a report published by Cotton Incorporated.

The July NY/ICE futures contract, reflecting prices for delivery during the current marketing year, has fallen from 93 to 77 cents/lb since early April. The December NY/ICE futures contract, reflecting expectations for the 2024/25 harvest, has also decreased, moving from 84 to 75 cents/lb over the past month. This convergence of prices for the current and upcoming marketing years suggests a shift in market sentiment towards a more balanced supply-demand situation.

"Concern about exportable supply was a factor that provided lift for prices early in 2024," Cotton Incorporated explains. "More recently, those concerns appear to have reversed."

This shift in market sentiment is driven by the anticipated increase in global cotton production. The USDA projects a significant increase in US cotton production, reaching 16.0 million bales in 2024/25, the largest year-over-year increase. Brazil is also expected to set a new production record.

"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.

The report also highlights the potential for a decrease in Chinese import demand, which played a significant role in driving prices higher in 2023/24. China's heavy purchases from its reserve system, which exceeded sales from the reserve, could lead to a reduction in imports in 2024/25.

"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 explains.

Despite the expected increase in global production, the report cautions that the US harvest is notoriously difficult to predict due to ongoing drought concerns in West Texas. While recent rains have improved germination prospects, uncertainty about the ultimate impact of weather conditions on the US crop remains a key factor.

Overall, the market is witnessing a downward trend in cotton prices, driven by a shift from concern about exportable supply to potential oversupply in the 2024/25 marketing year. The balance between the anticipated increase in global supply and potential shifts in demand, particularly from China, will play a crucial role in months ahead.