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

In USDA's Jan supply-demand report, 2023/24 global cotton supply and demand data has not adjusted. For 2024/25 season, production and ending stocks have significant changes. The increase in production is mainly attributed to expected growth in cotton production in China, with slight increases noted in Australia and the U.S. Changes in imports, consumption, and exports are not significant, leading to an upward adjustment in ending stocks due to the increase in production.

There remains some room for upward adjustments in China's production. As of January 13, 2025, the cumulative inspection volumes of cotton in the 2024/25 season reached 6.0864 million tons nationwide, with Xinjiang cotton accounting for 5.994 million tons. Based on past experience, inspection volumes generally stabilize after March, and by mid-January, the inspections are typically in the latter half of the process. Since the beginning of this year, the daily average inspection volume of cotton nationwide has increased by 33,400 tons, which is 9,200 tons higher than the daily average inspection volume in January of last year. The inspection progress is lagging behind the same period last year, while after January 13 of last year, inspection volumes continued to increase by 563,000 tons. Therefore, it is estimated that the remaining inspection volume this year will be at least 563,000 tons, and the final inspection volume is expected to be between 6.65 million and 6.75 million tons. This is still about 120,000 to 220,000 tons higher than the USDA's production estimate of 6.53 million tons.

Pakistani cotton production may be further lowered. As of December 31, the cumulative arrivals of cotton in Pakistan, as reported by the PCGA, reached 845,000 tons, a year-on-year decline of 33%. Since November, the arrivals of new cotton in Pakistan has maintained a year-on-year decrease of approximately 33.3%, with the final estimated arrivals expected to be around 867,000 tons (based on last year's cumulative arrivals by the PCGA and a year-on-year decline of one-third). According to the USDA balance sheet for the 2023/24 season, the production in Pakistan was 1.52 million tons, while the production is forecast at 1.01 million tons in 2024/25 season. Therefore, even though the USDA lowered Pakistan's cotton production to 1.13 million tons in January, there remains an adjustment space of about 120,000 tons.

From a market perspective, the rebound in August and September was driven by the USDA's continuous downward revisions of global production estimates, which significantly narrowed the production-consumption gap. However, the market quickly turned bearish, primarily due to notable changes in China's production estimates and the ongoing weakness in US cotton exports to China. Despite the negative impacts released this month, the January report indicated that the global cotton production-consumption gap for the 2024/25 season widened to 780,000 tons, an increase of 130,000 tons compared to the report in Jul, 2024. Nevertheless, the market found clear support around 66cent/lb and in the medium term, as we approach the halfway mark of the new season, the fundamental factors in cotton make it difficult for the market to break through previous lows. Speculative sentiment in cotton has noticeably slowed, with price fluctuations increasingly tied to macroeconomic expectations.

Therefore, whether it is ICE cotton or ZCE cotton, the risks of market disruption caused by macroeconomic fluctuations remain. For ICE cotton to enter the 60-65cent/lb, two factors are crucial: first, whether the new tariff policies imposed by Trump on China and Southeast Asia will be further intensified; current signals suggest a gradual increase in tariffs, rising by 2% to 5% each month, ultimately imposing a 10% to 20% tariff on all imports. Second, the direction of the Federal Reserve's monetary policy is also significant; the U.S. dollar index has risen to around 110, with the continuous upward trend increasing competitive pressure on U.S. cotton exports. In summary, as the global cotton balance sheet gradually narrows, the cotton market's trends in the next 3-6 months will be more closely linked to changes in the global political landscape and U.S.-China trade tensions.