The tug-of-war between lack of cotton supply and slowing cotton demand, due to global recession fears and Texas’ drought, is setting global cotton prices up for a turbulent summer trading season.
On Friday, ICE July cotton futures gave back 21% as positions were liquidated out of the nearby July futures ahead of first notice day, and on Monday contracts posted further losses, with the curve closing limit down. But the global recession fears that drove this sharp drop are at odds with supply loss expectations out of the US.
The US ranks as the third largest cotton producer globally, and Texas is the US’ largest cotton-producing state.
Texas cotton-growing areas continue to experience “severe” levels of drought, according to Gro’s Climate Risk Navigator for Agriculture, which can weight drought readings and other growing conditions by specific crops. Soil moisture levels in cotton growing areas of Texas are at their lowest levels since at least 2010, and little rain is in the near-term forecast. This will have an outsized impact on abandoned acres when Texas harvests its cotton crop in September.
For the week ending June 26, Texas was rated 17% good-excellent, the lowest reading in at least five years. Generally, for the US cotton crop, only 37% of the US cotton crop was rated in good-excellent condition, off 3 points versus the previous week.
While a drop in Texas cotton production would have far-reaching effects on global cotton supplies because the US is the largest exporter of cotton worldwide, a global recession could weigh heavily on export demand. Net export sales for the week ended June 16 were a new marketing year low of 16,200 running bales.
The US exports almost half of its cotton to China, where continued lockdowns are fanning uncertainty. Additionally, economic setbacks could curb world consumption projections for both the 2021/22 and 2022/23 marketing year, and market participants are worried that inflation will constrain consumer spending on textiles. Exports make up the majority of the US balance sheet demand category.
Meanwhile, across West Texas this July, drought pressure and heightened levels of abandonment, as Gro forecasted here, will weigh negatively on supply, even though Texas saw a 7% increase in planted cotton acres, as reflected in the March Prospective Plantings.
In India, the world’s second largest cotton producer and third largest cotton exporter, accumulated rainfall for the month of June is well behind average for the cotton-weighted area. It is still early in India’s growing season, but a previous Gro analysis found that the success of the crop is correlated with rainfall accumulation during the June through September monsoon period.