Interpretation of USDA’s Jul supply and demand report on cotton

USDA has released its July supply and demand report on Jul 12, and this time of adjustment was bearish somewhat. For the monthly change, 2022/23 global cotton production was forecast 360kt higher, and the increases were mainly from 220kt of India and 110kt of Brazil. Global cotton consumption was forecast to rise by 150kt, and ending stocks might rise by 230kt. For 2023/24 season, global cotton stocks were projected to rise by 120kt.

1. USDA's Jul supply and demand report

In the report, there were significant adjustments to the global cotton supply and demand for the 2022/23 season. Global cotton production was increased by 360,000 tons, with the increases of 220,000 tons from India and 110,000 tons from Brazil. Global cotton consumption was also adjusted up, with an increase of 110,000 tons from India. Ending stocks were forecast to rise by 230kt to 1.72 million tons.

2023/24 global cotton supply and demand was adjusted slightly. Global cotton production was increased slightly by 30,000 tons, including a higher of 130,000 tons from Pakistan and a lower of 90,000 tons from Australia. Global cotton imports were reduced by 50,000 tons. Cotton imports of China were forecast to rise by 50,000 tons, which was in line with the expectations that China might increase the imports due to tight supply in the fourth quarter. Global cotton consumption was lowered by 120,000 tons, including a decline of 110,000 tons from China. Global ending stocks was forecast to rise by 380,000 tons.

2. Supply pressure continues to increase with good expectation of Brazilian cotton

Recently, Brazilian new cotton started to arrive on the market. As 2021/22 cotton export shipments were unfavorable, and 2022/23 cotton production was expected to be good, now USDA, Abarpa and CONAB all forecast a high production of Brazil in 2022/23 season, about 2.98 million tons. Therefore, Brazilian cotton inventory pressure is increasing. In Jun, weather condition was favorable in Brazil, very favorable for the cotton harvests, but the harvest progress was slow, which showed the higher supply pressure.

3. 2022/23 Indian cotton production may be underestimated

By end Jun, Cotton Association of India raised the 2022/23 Indian cotton production to 5.29 million tons, and arrivals were projected at 4.79 million tons. And according to Cotton Corporation of India, arrivals were 5.24 million tons by now, and based on the trend, production might be 5.4-5.5 million tons, up 100-200kt from last season, which was in line with the planting areas and weather condition. Therefore, the cotton supply in India may not be as tight as expected, which explains why Indian cotton prices did not experience the anticipated significant increase. Instead, recently there has been downward pressure on cotton prices due to the cotton arrivals and the slack season. Therefore, the support for global cotton prices in the third quarter is likely to come primarily from China.

4. Conclusion

Overall, as the expectations of abundant cotton production in Australia and Brazil are being realized, pressure is accumulating on the supply side of cotton from overseas sources. USDA's Jul supply and demand report gives a bearish outlook somewhat. China may become the sole high ground for global cotton prices. Recently, the price spread between Chinese cotton/cotton yarn and international cotton/cotton yarn enlarges, and the import business may improve somewhat in the second half year.