Recent weeks have been a volatile period for New York futures prices.  A strengthening dollar, combined with a retreat of speculative funds from commodity markets, brought about a general decline in commodity prices that spilled into cotton markets.  Nearby prices sank below 67 cents/lb, December contracts fell below 70 cents/lb and are at eleven month lows, and March 2009 contracts dropped below 75 cents/lb.  Among the factors contributing to the flight of speculative monies was the credit crunch and the threat of additional regulation from expanded Commodities Futures Trading Commission (CFTC) authority through the Commodity Markets Transparency and Accountability Act of 2008.  Despite bipartisan support (276 for vs. 151 against), the act failed to receive the necessary two-thirds majority in a roll call vote held in the House of Representatives on July 30.  

As with cotton prices, world cotton production and consumption figures have been dynamic and in its August report the USDA reduced both its world production (-2.8 million to 112.2 million bales) and consumption (-1.4 million to 124.6 million bales) estimates for 2008/09.  Largely responsible for the reduction in the world production estimate was a dramatic downward revision (-1.5 million bales to 24 million bales) for Indian production.  With a dry monsoon season limiting Indian acreage, this was the second consecutive significant reduction in the estimate for Indian production (July’s estimate was 1 million bales less than June’s).  The current August figure suggests the first year-to-year contraction in production since India allowed commercial distribution of Bt cotton in 2002/03.  Already tight domestic supplies contributed to a spike in Indian cotton prices in recent months that, along with the elimination of both an import levy and tax as well as the removal of an export incentive, have increased Indian imports and reduced exports.  With contracted production in 2008/09, the estimate for Indian imports was revised upwards 300,000 bales and the estimate for Indian exports was reduced 950,000 bales.  As the world’s second largest exporter, this forecasted reduction in Indian shipments abroad should open export market potential for other cotton producing nations.  Correspondingly, the U.S. (+500,000), Brazil (+100,000), and Uzbekistan (+100,000) all had upward revisions for exports.

Demand for cotton imports, however, may be tempered by a slowing global economy.   China’s estimated consumption was reduced for the second straight month (-500,000 bales this month, one million bales last month) and there were also notable downward revisions for India (-300,000), Turkey (-300,000), and Pakistan (-250,000).  Nonetheless, the total reduction in this month’s estimate for world consumption was only half the reduction for global production.  This increases the current estimated production-consumption gap (12.3 million bales) by 1.4 million bales.  Existing stocks will have to fill this gap and will result in a contraction of ending stocks (-9.4 million bales relative to 2007/08).  Among the countries expected to have a large decrease in ending stocks is the U.S., whose ending stocks are currently at a 40 year high, and who is expected to export 1.2 million more bales more than they produce (13.8 million bales) in 2008/09.  Given the traditional inverse relationship between the stocks-to-use ratio and price (i.e., lower stocks to use ratio tend to occur with higher prices), these reductions in both the world and U.S. stocks may signal higher prices in upcoming crop year.