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

1. USDA raises 2023/24 cotton consumption in its Oct report

In the global cotton supply and demand balance sheet released by the USDA in October, the data adjustments for the 2023/24 season are not significant. Specifically, the USDA has mainly increased the consumption by 150,000 tons to 24.79 million tons, with the primary adjustment being an increase of 110,000 tons in China's consumption to 8.38 million tons. In other data, production was slightly raised by 20,000 tons, ending stocks were reduced by 90,000 tons, imports were increased by 50,000 tons, and exports were raised by 10,000 tons. Overall, influenced by the high production and exports of Brazilian cotton in 2023/24, global cotton trade volume has notably increased in a situation where global production has decreased, while the estimated consumption growth compared to the previous year is not significant, projected to only rise by around 260,000 tons.

2. USDA forecasts a higher production for 2024/25 season

Compared to the data from previous month, the fluctuations in the 2024/25 balance sheet continued to narrow, with production remaining the focus for the market. Specifically, the 2024/25 production has been revised upward by 50,000 tons to 25.4 million tons, primarily due to an increase of 70,000 tons in China and 20,000 tons in Brazil. In contrast, the United States has adjusted its production downward by 70,000 tons to 3.09 million tons due to the adverse impact of recent hurricanes and other extreme weather, with no changes made to the production estimates of other major producing countries. Additionally, the USDA revised the beginning stocks down by 90,000 tons, and both import and export estimates were lowered by 110,000 tons, resulting in an ending stock reduction of 30,000 tons to 16.62 million tons.

Overall, as the harvesting and arrival progress in major producing countries advances, future production adjustments are expected to be relatively limited. In the short term, the main focus will still be on the production expectations in the United States and China, as well as the marketing situations in Pakistan and India. According to our statistics, there has been a significant decline in the new cotton arrivals in both India and Pakistan compared to the previous year. As of Oct 6, 2024, the cumulative arrivals for the 2024/25 season in India was 179,800 tons, representing a year-on-year decrease of 53%. As of Sep 30, the cumulative new cotton arrivals for Pakistan in the 2024/25 season reached 316,000 tons, down 59% from the previous year. This decline stems partly from a reduction in planting area and partly due to weather factors affecting the harvesting progress.

3. Brazil's CONAB forecasts high production for the 2024/25 season

According to the latest production forecast data released by CONAB in Oct, Brazil's total cotton production for the 2024/25 season is expected to be 3.665 million tons, an increase of 80,000 tons compared to the 2023/24 season. The planting area for the new season has risen to 2.0013 million hectares, with a slight increase in production; however, yield has decreased compared to the previous year, falling to 122.1 kilograms per mu. Currently, Brazil continues to face export bottlenecks, with export expectations only slightly improving from the previous year, rising by just 80,000 tons. The quality advantage of U.S. cotton has diminished compared to Brazilian cotton due to this year's climate disasters in the U.S.

Overall, the USDA's downward adjustment of U.S. cotton production for the 2024/25 season in Oct was in line with market expectations. Setting aside the objectivity of the increase in China's production, it is evident that the production has gone through a process of significant adjustments to minor corrections thus far. New cotton has arrived in the major cotton-producing countries, and it can be anticipated that there will be corrections to the production in the future, although the extent of these adjustments may not be substantial (sudden adverse weather conditions can still have a significant impact and will require close attention). Aside from weather factors affecting supply, another point is that demand-wise. U.S. cotton export sales to China have been always important. However, due to declining quality of U.S. cotton and limited quota volumes, the export sales to China for the new crop year has remained stagnant; this continues to be a key issue going forward.

In addition, on the macroeconomic front, it has been the core factor driving fluctuations in ICE cotton futures recently. Currently, the Federal Reserve's ongoing discussions about a smaller scale of future interest rate cuts have led to a continuous rise in the U.S. dollar index. However, the realization of rate cuts and the adjustment of U.S. economic data will bring overly optimistic market expectations back to reality. Therefore, for ICE cotton futures, there is still a chance for a rebound after reaching a certain support level, with short-term support expected around 67cent/lb.