Cotton futures were one of the best performers among agricultural commodities last year, rising by 11.3% in New York.
Indeed, that represented a third successive year of gains, as the grim scenarios which greeted China’s decision to windown inventories - auctioning off a huge stack of fibre, meaning a steep drop in import needs – have not played out as expected.
China’s auctions have gone better than expected, indicating strong demand, while the country’s production has eased off, allowing the mantle of top cotton-growing nation to be taken by India – whose own crops have now been undermined by pest attacks.
For the US, cotton exports have soared well above initial expectations, eating into some of a 2017-18 harvest which has exceeded forecasts too.
But will the strong prices encourage extra 2018 production, bringing cotton’s rally to an end? Or can cotton futures rise for a fourth successive year, somethign not achieved yet on data going back to the 1970s?
Experts give their views, made before Thursday’s limit-up close to cotton futures.
Mike McGlone, Bloomberg senior commodity strategist
“Unless current trends reverse, cotton is poised to extend its highs in 2018.
“Rapidly increasing US export demand and the weak dollar are primary supports, offsetting strong production.
“Averaging near 73% exports-to-production, US cotton is becoming increasingly attractive amid the worst performance for the trade-weighted broad dollar in eight years.
“Cotton exports bottomed in 2009, similar to 2016 as the dollar weakened. From the 2009-11 low to peak, cotton increased fourfold, coincident with a 27% dollar decline.
“Cotton is up almost 40% from 2016’s seven-year low versus a 7% dollar drop. Speculators are a bit extended, which may limit shorter-term gains.”
Commerzbank
“It is not only in the US that cotton production is on the rise in 2017-18, however, but worldwide.
“This is because all other leading producers are also expanding production, especially the largest producers – China and India.
“According to the USDA… 2017-18 is likely to see a small surplus on the cotton market after two years of deficit, and thus to an inventory build.
“Robust US cotton exports are to thank for prices not falling even lower and now trading marginally higher than at the start of 2017.
“Whereas demand had initially been expected to stagnate year-on-year, the USDA recently estimated the increase in demand in 2017-18 at 5m bales or 4.5% - in China, Bangladesh and Vietnam, among other countries – putting it at its highest level in ten years.
“Apart from global economic growth, one role in this is played by the fact that competing artificial fibres have become more expensive because of the higher oil price.
“For the fourth quarter of 2018 we forecast a cotton price of 72 US cents per pound.
Goldman Sachs
“While supply expectations remain high, we have cautioned that these need to be balanced against accelerating global growth.
“Rising crude oil prices also point to slightly less competition from man-made fibers.
“For now, we revise our 3, 6 and 12 month forecasts of prices to 75 cents a pound on the expectation that global growth is likely to remain strong, but not accelerate much further.”
Ron Lee, McCleskey Cotton
“I am fielding calls each and every day about pricing cotton for 2018 and, while I will not talk anyone out of doing so at these levels, I think better opportunities are in front of us.
“The fact of the matter is, and Joe Nicosia, head of Allenberg Cotton Company, really called this correctly almost a year ago on the speaking circuit, in that the US is going to need big cotton crops for the foreseeable future and if we don’t produce them, prices are going to move higher.”
“Cotton area has left eastern China, likely not to return, and Indian specialists… were quoted as encouraging their growers to look for alternative crops to cotton as the pink bollworm pest continues to wreak havoc on their domestic crops.
“Demand is growing as the era of "cheap polyester" is coming to a close with the global focus on pollution and the sensitivity toward the environmental footprint and hopefully that should return cotton based products to the store shelves at a more rapid rate.
“Population growth and the establishment of a middle class in other countries will also play a part in cotton’s revival.
“The world is simply going to rely on the US to produce a large, high quality crop of cotton.”
Rabobank
“A more bullish price trend is expected to emerge in late 2018, driven by strong global consumption and stock erosion, taking prices to 72 cents a pound by late 2018.
“Looking to 2018-19, Rabobank expects further global stock erosion, led by China, to 79m bales, down 10m bales year on year.
“Global 2018-19 production is expected to fall 7m bales year on year, while consumption growth lifts 2% year on year, predominantly driven by South East Asia.
“With US exports extending to 14.9m bales, 2018-19 sees the US run just a 220,000-bale deficit year – keeping stocks comfortable at above 5m bales.
“Growth of 2% in world consumption is forecast to drive an additional 1m bales year on year of global trade.
“Rabobank also foresees a bullish conclusion to Chinese destocking – forecast to end in 2019-20 – which will gain more attention in 2018-19, assisting prices above 70 cents a pound.”
Societe Generale
“The market continues to focus on growing cotton deficits in China where the government is liquidating its huge stockpiles following sharp domestic production declines since 2015-16.
“As per our estimates, cotton deficits in China are likely to remain at circa 14m 480-pound bales while China will exhaust its state reserves during 2018-19, leaving consumers to buy cotton from other sources.
“Cotton prices in China are still not high enough for farmers to increase acreage substantially and clear the deficit over the coming years.
“China could substantially increase the import quotas from 2017-18 onwards. This in turn could increase demand for US cotton and support prices near 70 cents a pound.”