Source: https://www.wsj.com

Futures shed one-fourth of their value in a month as slowing consumer demand overshadows potentially poor harvest

By Kirk Maltais

Sept. 28, 2022

Cotton prices have dropped back to earth, with concern about slow demand overshadowing a potentially poor harvest while the dollar surges to 20-year highs.

Futures have shed 25% since late last month, effectively eliminating gains fueled by a U.S. Department of Agriculture forecast that more than 40% of U.S. acres planted with cotton this year wouldn’t be harvested because of drought.

The drop brings prices closer to their typical levels, with the most actively traded futures ending Tuesday at 88 cents a pound, down more than 40% from their peak in May, which was the highest price in more than a decade. Cotton prices had been trending higher during the pandemic, surging past $1 a pound a year ago after restrictions on cotton produced in China’s Xinjiang region out of concern that forced labor is used to harvest it. Cotton prices have only exceeded $1 a pound three times since the late 1950s. 

Much of the recent selling pressure comes from the struggles of clothing manufacturers, who are forecasting a drop in demand as growth slows and appetite for their products diminishes. The online retailer ASOS recently warned that profits would be at the low end of its full-year forecasts. Primark, a fast-fashion brand, warned of lower profits ahead, citing high energy costs and a strong U.S. dollar.  

Lifted by interest-rate increases from the Federal Reserve, the dollar has soared, increasing the cost of U.S.-grown cotton for overseas mills. Other central banks around the world are also lifting rates, moves analysts expect will slow growth and eventually hurt consumer demand for clothing and other cotton goods. Those worries are similar to those that have hit stocks in recent months.  

“With the increase in interest rates and general recessionary fears, inflation, etc.—the thought is there will be more spent on food, fuel, necessary items for living as opposed to clothing, furniture, etc.,” said Donna Hughes, a risk consultant with StoneX Group. 

China, one the world’s largest cotton consumers, is reporting decreased imports of cotton and growing inventories left unsold. Citing Chinese customs data, the industry publication Cotlook said in its most recent monthly outlook that China imported 1.7 million metric tons of raw cotton in the marketing year that ended in July. That is down more than 60% from the same period last year. 

Additionally, commercial stocks of unsold cotton are at an all-time high for this time of year, says Cotlook, with more than 3 million metric tons of cotton accumulated. Supply issues are still looming, which could quickly turn cotton prices around. The U.S. cotton crop has been hard-hit by dry weather over the growing season. Data from the U.S. Drought Monitor showed much of the south central U.S. to be in extreme or exceptional drought throughout the summer. 

In Pakistan, severe flooding in key production regions, including Sindh and southern Punjab, is expected to reduce production by more than 1 million 480-pound bales in the current marketing year, according to a recent USDA report. While these supply issues are seen as supporting cotton prices in the long term, traders still expect flagging consumer demand. “There are just a whole host of demand problems that have offset really bullish supply-side issues,” said John Payne, a trader with HedgePoint Global Markets. (Source: https://www.wsj.com)