Apparently, a crop forecast beats a currency devaluation.
While the Chinese government’s devaluation of its currency this week caused a slight dip in the China Cotton Index, Cotton Incorporated’s latest state-of-the-market report noted that the U.S. Department of Agriculture’s most recent revised crop forecast was more impactful in firming up prices.
Cotton Inc. said prices for the most actively traded December futures declined slowly but steadily throughout the month of July. In August, however, prices broke out of the 63 cents to 68 cents a pound range for the first time since March before settling back to 63.61 cents a pound on Thursday.
However, following the release of this month’s USDA report, which featured large downward revisions to figures for U.S. production and ending stocks in the 2015-16 crop year, cotton prices rebounded from levels near 62 cents a pound back to about 65 cents.
“The Chinese government facilitated the largest percentage decrease in the value of the [yuan] relative to the U.S. dollar since 1994 early this week,” Cotton Inc. said Friday. “The shift in the exchange rate lowered the value of the CC Index in dollar terms slightly, (from 96 to 93 cents a pound). In local terms, the CC Index has been steady at values near 13,150 [yuan] per ton.”
This month’s USDA report featured an important downward revision to global cotton production and a series of changes to historical mill-use numbers. At the world level, the 2015-16 harvest projection was reduced 2.5 million bales to 109 million. The global mill-use number increased slightly, rising 210,000 bales relative to last month’s figure to 114.6 million. In combination, these revisions drove the 2.9 million-bale reduction to the 2015-16 forecast for ending stocks to 105.2 million.
“Despite this decrease, the amount of cotton expected to be stored in the world’s warehouses at the end of 2015-16 remains extraordinarily high by historic standards, with a stocks-to-use ratio of 92 percent,” Cotton Inc. said.
At the country-level, the largest revisions to production figures were made for the world’s largest cotton producers, including the U.S., China and India (minus 500,000 bales to 29.0 million).
The Cotlook A Index, which averages world cotton prices, followed New York futures prices lower throughout July and August and dropped to values below 70 cents a pound for the first time since April.
The response by New York futures to the latest USDA release was likely driven by the substantial changes made to figures related to the U.S., Cotton Inc. noted.
This month, the U.S. planted acreage number was lowered 100,000 acres nationally to 8.9 million. Abandonment, which refers to acreage planted but not harvested due to poor crop conditions, was doubled to 1 million acres, reflecting the ongoing drought in California. In combination with a decrease in the national yield forecast, these changes generated the 1.4 million bales, or 10 percent, decrease in U.S. harvest expectations this month.
Accompanying the reduction to the U.S. harvest estimate were changes to U.S. export numbers and ending stocks. For 2015-16, the U.S. export estimate was lowered 800,000 bales to 10 million. Cotton Inc. added that the implied tightness in U.S. supplies could emerge as a factor supportive of prices in 2015-16.