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

1. USDA adjusts 2023/24 global cotton production downward

In the global cotton supply and demand balance sheet released by the USDA in November, the most notable adjustment for the 2023/24 season was a reduction of 140,000 tons in global production compared to the previous month. In other data, beginning stocks were reduced by 40,000 tons, imports increased by 10,000 tons, exports decreased by 30,000 tons, and ending stocks were lowered by 130,000 tons. Specifically, the downward adjustment in global production for 2023/24 was mainly due to a reduction of 90,000 tons in India's production. According to the data, the USDA referenced the Indian production figure of 5.53 million tons from the September CAI balance sheet; however, the CAI had previously increased its estimate for Indian production. Therefore, the USDA's estimates for Indian production in the past few months may have had a degree of subjectivity. This adjustment leads to a decline in ending stocks, which also implies a decrease in beginning stocks for 2024/25, which may provide some support for ICE cotton.

2. USDA adjusts lower 2024/25 balance sheet further

USDA has adjusted lower the 2024/25 balance sheet for the fourth consecutive month as of November. As previously mentioned, the primary reason for the decline in inventory is the USDA's proactive adjustment of Indian cotton production, leading to a global production decrease. Specifically, the 2024/25 balance sheet has reduced production by 100,000 tons to 25.3 million tons, lowered the beginning stocks by 130,000 tons to 16.24 million tons, and decreased the ending stocks by 130,000 tons to 16.49 million tons. Additionally, the USDA has lowered import volumes by 70,000 tons, consumption by 110,000 tons, and export volumes by 60,000 tons.

In this production adjustment, the U.S., Brazil and China did not contribute to the reduction figures. Among the major producing countries, only the production of Pakistan reduced by 40,000 tons, while the total production cut of 100,000 tons seems somewhat insufficiently justified. Overall, the USDA's November balance sheet provides relatively clear support for ICE cotton futures market. Moving forward, attention should be paid to whether stocks and production will be further adjusted downward.

3. The inspection progress of 2024/25 U.S. cotton may continue to be faster

According to USDA, as of the week ending November 7, 2024, the cumulative inspection volume of U.S. upland cotton and Pima cotton reached 1.24 million tons, accounting for 40.1% of the estimated U.S. cotton production (the estimated production for the 2024/25 season is 3.09 million tons). The inspection volume for upland cotton was 1.2254 million tons, with an inspection progress of 40.7%, which was 23.1% faster than the same period last year; the inspection volume for Pima cotton was 14,600 tons, with an inspection progress of 10.3%, which was 98.9% faster year-on-year. Following the consistently fast growth rate of U.S. cotton earlier, both the harvesting progress and inspection progress have significantly outpaced the same period last year, indicating that the overall inspection progress for U.S. cotton in the later stages will likely remain ahead of schedule.

Looking ahead to the medium-term trends for ICE cotton, on one hand, the abundant production of Brazilian cotton and high export volumes continue to put pressure on U.S. cotton. On the other hand, uncertainties regarding the quality expectations of U.S. cotton and the consistently fast harvesting progress add upward pressure on ICE cotton. Additionally, macroeconomically, the expectation of significant tariff increases on China following Trump's administration may trigger a short-term surge in U.S. import demand, but in the medium to long term, the outlook remains predominantly bearish. Furthermore, rumors of appointing Scott Bessenet as Secretary of the Treasury, who has consistently advocated for a strong dollar policy, may further suppress ICEcotton futures on the monetary front. It is anticipated that ICE cotton may experience a certain rebound after hitting a short-term bottom, but the medium-term outlook remains weak.