Cotton futures fell sharply on Thursday, March 25th, after Wednesday's prices rebounded over USDA's report. The planting intentions report inaccurately reflected the true planting intentions of the nation's farmers. May 2021 cotton futures finished at $0.7795, down 3.76% on the day and 0.76% on the week. July cotton futures finished $0.7927, down 3.68% on the day and 0.47% on the week. December cotton futures finished $0.7791, down 2.91% on the day, yet were up 1.58% on the week.
Prices largely fell on Thursday (March 25th) due to a poor USDA weekly export report. The report showed that net export sales were 78,400 bales for the week, down 71% from the week prior and from the prior 4-week average. This poor report reflected the large cancellations in orders from both China and Indonesia. These cancelations from China may reflect continuously sourcing relations between China and the Biden administration.
Amongst these cancellations, the U.S., along with other nations, is raising investigation concerns over alleged forced and slave labor in China's western province, Xinjiang. Xinjiang is China's largest province in terms of cotton production. In January, the Trump administration banned all cotton imports from the region, which ignited higher tensions. Additionally, as the pandemic worsens worldwide, such as the recent lockdowns in Europe and South America, international demand is not rising as fast as expected during the global economic recovery from the COVID-19 pandemic. Both factors helped play into the abysmal USDA export report this week.
Shifting focus to Wednesday (March 31st) of this week, the markets across all months of futures for cotton saw an increase in prices. This was due to some traders challenging USDA's planting intentions report for the new year. USDA's report expected an estimate of 12 million acres of cotton in the U.S. this year, which is the same as released in a preliminary report back in January 2021.
Traders were in disbelief about this report because it showed that other crops, including corns and beans, had markdowns in their expected acres planted this year. Cotton traders also expected less planted acres because of poor weather and persistent drought conditions across the South and West, which may continue in the future. These discrepancies in the actual report numbers from traders' expectations caused fears that the report may be inaccurate. Therefore, causing a bump in prices as traders believed they were overestimating acres to be planted.
Overall, the market prices did not change much when looking over the past five days. Although markets will be closed on Good Friday, the March jobs report will still be released tomorrow. Traders and textile companies alike should keep an eye on this report to get a better idea of the recovery in the U.S. economy.
As we shift back to international affairs, let's take a deeper dive into how relations between the U.S. and China could affect domestic cotton prices.
How are cotton prices and other commodities being affected by worsening relations between the U.S. and China?
The US-China trade war began in 2018. President Trump imposed tariffs on imports from China because of what the U.S. calls "unfair trade practices" and accusations of intellectual property theft. Since then, relations between the U.S. and China have soured and show no signs of improving any time soon.
If there were any hopes that relations might improve after administration changes, they were quickly dismissed after the Biden administration's first meeting with Chinese diplomats. The meeting held on March 18th ended with an exchange of insults. Additionally, the U.S.'s boycott earlier this year, along with major companies such as Nike, of cotton products from China's Xinjiang province signaled that relations were worsening. The latest cancellation of American cotton imports to China could be a retaliatory action against this ongoing boycott. If these actions continue, they could spell disaster for U.S. cotton exports.
Exports are a huge component of the U.S. cotton industry. The U.S. is the world's largest cotton exporter and export 3 to 4 times what is consumed domestically. These exports account for 81.5% of total U.S. production over the past decade. In 2017, 16% of U.S. cotton exports were to China. As China is the second-largest importer of U.S. cotton, with Vietnam being the first, actions like these can affect the international demand for U.S. cotton.
Overall, China is a large importer of agricultural products from the U.S. in general. They are also the largest importer to the U.S. in terms of overall trade. Therefore, it is evident that US-China trade is economically vital to both countries. Traders and textile companies to keep an eye on the ever-evolving relations between these two countries. Any ramping up of the ongoing trade war could significantly reduce the overall international demand for U.S. agricultural products, especially cotton.
Where are cotton prices headed?
For the moment, it seems as though cotton futures prices have stabilized. Most traders and companies are waiting for trajectory data regarding the U.S. and worldwide economic recovery. If the current wave of the COVID-19 worsens domestically and abroad prices, then lower international demand could drop futures further. On the other hand, if poor growing conditions due to extreme weather and dry conditions persist over the next few weeks, limited planting could drive prices upward.
It seems that markets are at crossroads. Therefore, it could go either way. The best way we recommend staying ahead in these unknown times is to keep an eye out for the two March jobs reports to be released Friday, April 2nd. Additionally, we recommend keeping an eye on growing and weather conditions across the South and West of the U.S. Both factors will weigh the futures markets in the coming week.
Our projections for cotton futures prices were made using exponential smoothing with an alpha value of 0.5 to reflect the fast-paced changes in the market that can happen at a moment’s notice. A higher alpha value allows us to put more weight on more recent data points, therefore causing them to affect our projections more than data points from long ago.
Figure 1. The expected future market price of cotton by May 2021.
Figure 2. The expected future market price of cotton by July 2021.
Figure 3. The expected future market price of cotton by December 2021.