The January World Agricultural Supply and Demand Estimates cotton numbers from USDA included some major downward revisions in foreign production, particularly for Pakistan, India, and China). 

That now implies a 17 million bale year-over-year reduction in world cotton production, which is a necessary adjustment. Forecasted world consumption now exceeds production by 9.4 million bales, and that represents a whittling down of the historically high world ending stocks. 

Another couple of years of this will help reduce excess supplies of old crop cotton in the world, mostly in China.  It should remove the upside cap on world prices that is implied by the excessive foreign inventory.

The January WASDE numbers showed only minor tinkering with the U.S. numbers (slightly lower production and lower mill use). The U.S. export forecast remained at 10 million bales, which defies the slow pace of both export sales and shipments. 

We may well yet see a downward revision in U.S. exports. That would raise ending stocks a tad, back toward the level of the beginning carry-in stocks level, and thus a neutral price implication.

PRICE FLUCTUATIONS

A perhaps more significant aspect of U.S. exports is the pattern of how they are reacting to price fluctuations in the near term. Figure 1 shows how weekly export sales of U.S. upland cotton vary with price fluctuations.

As expected, more U.S. cotton is sold when prices are lower. Larger sales spur prices higher, which eventually chokes off demand and sends prices lower. For about 16 months, this dance has been repeating within a fairly narrow 60 cents to 67 cents price range.

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The relationship between price and quantity sold for export is a normal, expected demand response. It is, however, separate and different from a fundamental change in demand. The latter would change how much cotton is bought at a given price, and it would result from changes in consumer preferences, taste, income, or the price of competing fibers like polyester. 

For example — and thinking optimistically — suppose we were to observe a spike in export sales following a period of competitively low prices. Since the higher export sales are a bullish indicator, this would typically be supportive of prices. But suppose that the strong sales continue as prices keep stair-stepping higher. After a few weeks of that, market analysts — and more importantly, market traders — would start thinking that a fundamental expansion in demand was occurring. 

DEMAND SHIFT CAUSES

Again, higher prices are just an indicator of this. The cause of the demand shift would be from polyester getting relatively more expensive, or a shift in consumer preferences for cotton over polyester, or an increase in consumer income, or an increase in consumer spending on apparel. 

I do not expect any of these things to happen anytime soon. But they need to happen. Without them we can see no sustained increase in cotton prices. And when they do happen it will show up as an altered dance pattern in Figure 1.  I’ll be watching and waiting.

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