ICAC warns cotton prices might withdraw next season

Despite acknowledging the recent upward trend, earlier in April, the International Cotton Advisory Committee (ICAC) warned that cotton prices will get down next season, regardless the smaller world inventory.

The industry body had previously estimated average cotton prices in 2017-18 at 73 US dollar cents a pound, as measured by the Cotlook A index of physical values.

If meeting this forecast, prices would come 5 cents lower than the 78 cents a pound expected for 2016-17, on an August-to-July basis, and bring to an end the recovery from the multi-year low of 70 cents a pound recorded last season, summed up analysts from ‘AgriMoney’.

The forecast comes amid growing uncertainty in cotton markets, as investors closely watch the dichotomy of the currently strong demand for U.S. exports of cotton and the prospect of a surge in the country's plantings this year. On the latter, the U.S. Department of Agriculture issued in early April a production outlook, pegging cotton plantings this year at 12.2m acres, what implies a 21 percent YoY increase. Furthermore, this estimate means 800,000 acres more than investors had expected, according to a Reuters survey.

”Global consumption may recover by 1 percent in 2017-18… as cotton prices decrease”

The ICAC acknowledged that "high yields and firm prices will encourage farmers in the U.S. to expand cotton area in 2017-18". However, the intergovernmental group said that "Production is expected to remain unchanged from 2016-17 at 3.8m tonnes [17.5m bales] as the average yield is assumed to be closer to the five-year average."

"Global consumption may recover by 1 percent in 2017-18… as cotton prices decrease, and growth in the global economy is expected to be much stronger in 2017 and 2018."

The ICAC's comments come amid significant debate among cotton investors over the significance of the US sowings data, which Rabobank termed a "strong bearish signal" for futures. "With cotton prices particularly attractive against alternative row crops, the market anticipated the increase, but certainly not to the extent of the USDA," Dutch Rabobank anticipated in a market research issued at the beginning of the month.

Similarly, Commerzbank said that after the USDA plantings figure, "it is more likely that the 2017-18 crop year will see a marked rise in the US cotton crop", a factor which could provoke selling pressure as speculators unwind a near-record net long in futures and options in the fibre. Looking ahead, the German broker added that "Correction potential… is likely to have materialised by now," Commerzbank said, adding that this "points to another price fall in the short term".

Photo: via Wikimedia author: Kimberly Vardeman