Cotton Faces Pressure, Despite Smaller Stocks Estimates

Cotton futures declined despite a bullish WASDE report showing a 900,000 bale reduction in new crop US carryout to 4.3 million bales, driven by increased export forecasts and reduced production; however, this was offset by a marketing year low in weekly export sales of 60,180 RB for 2024/25 and an 18-week low in shipments at 236,251 RB, suggesting weakening near-term demand.

Analysis

Cotton futures registered losses between 18 and 33 points on Thursday, with the Jul 25 contract closing down 33 points at 65.14 cents/lb, despite the release of a fundamentally bullish World Agricultural Supply and Demand Estimates (WASDE) report. The USDA's report projected a substantial 900,000 bale reduction in new crop U.S. carryout for 2024/25, bringing it down to 4.3 million bales, a consequence of a 400,000 bale increase in export forecasts combined with a 500,000 bale decrease in production estimates stemming from lower harvested acreage and yield. However, this supportive supply-side outlook was significantly overshadowed by acutely weak near-term demand indicators presented in the weekly Export Sales report. Specifically, 2024/25 bookings plunged to a marketing year low of 60,180 running bales, marking a sharp 45.18% decrease from the previous week, and shipments also retreated to an 18-week low of 236,251 running bales. External market factors that are typically supportive, such as an 82 cents/barrel increase in crude oil prices and a $0.754 decline in the US dollar index to $97.850, failed to buoy cotton prices. Adding to the mixed signals, ICE certified cotton stocks rose by 8,794 bales to 62,212 bales as of June 11, while the Cotlook A Index fell 45 points to 78.05 on the same day, although the USDA’s Adjusted World Price (AWP) did increase by 26 points to 54.02 cents/lb. The prevailing market behavior indicates a prioritization of immediate, weak export demand over the longer-term implications of a tighter supply forecast.

Key Decisions for Investors

• Investors should meticulously track upcoming weekly export sales and shipment data, as these figures are currently the dominant influence on price direction, eclipsing the bullish fundamentals presented in the WASDE report.
• A cautious stance is advisable given the pronounced divergence between the USDA's projection of a tighter long-term supply (evidenced by a 900,000 bale reduction in new crop carryout) and the immediate reality of severely weakened export demand (highlighted by marketing year low bookings).
• Recognize that the market is presently discounting the bullish long-term supply outlook due to pressing concerns about current demand; therefore, a tangible recovery in export activity will likely be a critical catalyst for any sustained price appreciation.