Interpretation of USDA's Aug supply and demand report on cotton

USDA releases the Aug supply and demand report last Friday, and this time of adjustment is relatively bullish for new season. For the monthly change, the adjustment on 2022/23 season is neutral, with a forecast of 150kt higher on global cotton consumption, mainly due to the 110kt increase in China. For 2023/24 season, global ending stocks are forecast 640kt lower, mainly due to the large decline on global cotton production, especially the 550kt decline of U.S. cotton production, giving periodical support to ICE cotton.  

1. USDA Aug supply and demand report

In the report, there were relatively small adjustments to the global cotton supply and demand for the 2022/23 season. Global production was revised upwards by 70kt, including 40kt higher on Brazilian cotton. Global consumption was increased by 150kt, largely driven by a rise of 110kt in China. Export and loss numbers were revised downwards by 110kt and 80kt respectively. As a result, the ending stocks was adjusted to increase by 40kt.

For 2023/24 season, the monthly change was obvious. Global cotton production was largely lower by 590kt, mainly due to the 550kt lower of U.S. cotton production. This adjustment in US cotton production was expected due to long-term speculation regarding high temperatures and drought in major cotton belts. However, the extent of the downward revision, even lower than the 2022/23 season, raises suspicions of whether it is an overcorrection.

In terms of 2023/24 global consumption, an increase of 110kt was observed, with China raising its consumption by 110kt and Turkey raising it by 20kt. Currently, apart from China, there are no significant signs of global consumption recovery. Based on the expectation of a consumption recovery in China and decreased cotton production in Xinjiang, China's cotton imports were also raised by 50kt. Global exports were raised by 80kt, with the export expectations for US cotton being significantly reduced by 270kts, while Brazil and Australia, benefiting from a good harvest, had their export expectations raised by 330kt and 20kt respectively. Global ending stocks were significantly reduced by 640kt, with China reducing its stocks by 190kt, Brazil reducing by 320kt, and the US reducing by 150kt.

2. U.S. cotton production is largely lower, speculation or correction?

The market speculation fueled by the high temperatures and drought in the United States, which has led to an increase in abandonment, has been ongoing for over a month. The market had already anticipated this downward revision in production, but there was still a frenzied reaction when the report was released. The reason behind this reaction is that although the drought conditions are worsening, the current growth conditions of US cotton are not considered too poor.

As of Aug 8, the drought severity and coverage index for the main cotton-producing regions in the US (92.8%) was at 118, which is 125 lower compared to the same period last year, with an increase of 19 from the previous week. The drought severity and coverage index for Texas was at 198, which is 182 lower compared to the same period last year, with an increase of 42 from the previous week. It can be seen that the soil moisture conditions are much better than the same period last year. Therefore, the market estimated a downward revision of around 200,000 to 300,000 tons, which seemed reasonable. However, the unexpected downward revision of 550kt and the yield being lowered to below last year's level took many by surprise.

Currently, bullish funds have not significantly withdrawn yet. It remains to be seen whether ICE cotton will move lower first and then gradually be in correction. It is important to continue monitoring whether the weather will further deteriorate and the impact will have on cotton growing.

3. Brazilian cotton exports are largely up, which may surpass U.S.

The biggest variable in this balance sheet adjustment, apart from US cotton production, is the export data of Brazilian cotton. USDA has increased the exports of Brazilian cotton by 330kt to 2.45 million tons, while the U.S. cotton exports has been reduced by 270kt to 2.72 million tons. The essence of this is rooted in the competition between Brazilian and US cotton. The worsening weather conditions for US cotton have benefited the export sales of Brazilian and Australian cotton.

The weather in the main cotton-producing regions of Brazil and Australia has been favorable this year, providing a good growth environment for cotton. This is reflected not only in the abundant harvest but also in the cotton quality. Therefore, the deterioration of soil moisture in the US has also raised concerns about the quality of US cotton. This can be seen from the historical export data of Brazilian cotton. The export shipments in July increased to 72,600 tons, compared to 60,300 tons last month and only 19,700 tons in the same period last year, showing a significant year-on-year increase and a recent upward trend in export volume, which is contrary to the usual downward trend in previous years. According to feedback from traders, the new crop of Brazilian cotton is expected to arrive at ports by the end of Aug, and the actual quality of the cotton will be assessed by the market. If the quality is ideal, the subsequent export volume of Brazilian cotton may meet expectations.

4. Conclusion

Overall, with the continuous speculations of hot and dry weather, the significant downward adjustment of US cotton production, the tight supply of cotton in China, and expectations of consumption recovery, concerns about the global cotton supply have escalated. The USDA report for the 2023/2024 crop year is biased towards bullish adjustments, providing temporary support for cotton prices in the short term. In the China domestic market, the increase in sales of cotton reserves may have a certain restraining effect on cotton prices. Coupled with the recent stagnant market conditions and lack of upward momentum, the downward adjustment of US cotton production by USDA has limited driving force on domestic cotton prices.