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

2024-12-31 09:49:38 CCFGroup

1. USDA forecasts 2023/24 consumption higher

In USDA's December supply and demand report, 2023/24 consumption is forecast 110,000 tons higher, and the beginning stocks are forecast 30,000 tons lower, production 10,000 tons lower and ending stocks 90,000 tons lower. The higher consumption is mainly due to 90,000 tons increase in Indian consumption, mainly a result of some downstream yarn demand shifting after the political unrest in Bangladesh in July, which also led to a reduction in India's ending stocks. Overall, the adjustment space for the 2023/24 season is quite limited.

2. USDA is too conservative on 2024/25 production adjustments

In the December data for the 2024/25 balance sheet, aside from the lower beginning stocks, production is raised by 260,000 tons to 25.56 million tons, and consumption is simultaneously increased by 120,000 tons, with ending inventory raised by 60,000 tons. Additionally, the USDA makes slight increases in both imports and exports, each by 20,000 tons.

Specifically, the increase in production is mainly due to the upward adjustment of 220,000 tons in Indian production, with slight adjustments in the United States and Brazil. However, there has been no increase in China's production, which may be due to the USDA's relatively delayed access to expected production data from China. In fact, the domestic market's estimate for China's cotton production has gradually risen above 6.5 million tons, with further upward potential anticipated. Therefore, it seems that there may be a trend for further increases in China's production. On the consumption side, due to the impact of tariffs imposed by Trump and the intensification of the trade war, there may still be a possibility of further downward adjustments. In summary, the likelihood of a global oversupply of cotton remains high.

3. Brazil's cotton sowing progress is ahead of last year in 2024/25 season

According to statistics from CONAB, as of December 8, 7.7% of cotton planting for the 2024/25 season has been completed. Overall, the early weather conditions for cotton planting in Brazil for the 2024/25 season have been favorable, with planting progress significantly ahead of the same period last year. Additionally, CONAB has not yet released its December production estimates, but it is expected that production data will remain high, with little change anticipated. In terms of exports, the volume exported to China has halved year-on-year. Although exports to Vietnam and Pakistan have somewhat compensated for this decline, the overall export volume still falls short of expectations.

For the ICE cotton futures market in medium term, the increase in production from the three major producing countries-Brazil, the United States, and China-essentially determines a loose supply situation in the market. Currently, the USDA's estimate for China's production is still significantly lower than domestic projections, indicating that there is still considerable room for upward adjustment in the future. This will present a challenge that domestic and international cotton prices will have to face as they rebound. The expectation for increased exports has yet to materialize, but there has been some evidence of replenishment in certain regions before the Spring Festival holiday. It is anticipated that ICE cotton futures may mainly fluctuate at low level, and remains weak in medium run.

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