NY Futures & A Index Rebound After Declines,Chinese Prices Stable

Recent price movement

Most of the worlds cotton prices moved lower over the past month. However， NY futures sharply reversed direction with the release of this months USDA report.

Prices for the most actively traded December futures declined slowly but steadily throughout the month of July. In August， prices broke out of the range between 63 and 68 cents/lb for the first time since mid-March by falling through support near 63 cents/lb. However， following the release of this months USDA report， which featured large downward revisions to figures for U.S. production and ending stocks in 2015/16， prices rebounded from levels near 62 cents/lb to those near 65 cents/lb.

The A Index followed NY futures lower throughout July and August and dropped to values below 70 cents/lb before rebounding with NY futures in the latest trading.

The Chinese government facilitated the largest percentage decrease in the value of the RMB relative to the U.S. dollar since 1994 early this week. The shift in the exchange rate lowered the value of the CC Index in dollar terms slightly （from 96 to 94 cents/lb）. In local terms， the CC Index has been steady at values near 13，150 RMB/ton.

Indian spot prices for the Shankar-6 variety moved marginally lower over the past month. In international terms， values declined from 69 to 67 cents/lb. In local terms， prices declined from 34，400 and 33，700 INR/candy.

Pakistani spot prices also decreased slightly. In international terms， values fell from 56 cents/lb to 53 cents/lb. In local terms， prices decreased from 4，700 PKR/ maund to 4，500 PKR/maund.

Supply， demand， & trade

This months 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 （from 111.5 million to 109.0 million）. The global mill-use number increased slightly， rising 210，000 bales relative to last months figure （from 114.4 million to 114.6 million）. In combination， these revisions drove the 2.9 million bale reduction to the 2015/16 forecast for ending stocks （from 108.1 million to 105.2 million）. Despite this decrease， the amount of cotton expected to be stored in the worlds warehouses at the end of the 2015/16 season remains extraordinarily high by historic standards， with a stocks-to-use ratio of 92%.

At the country-level， the largest revisions to production figures were made for worlds largest cotton producers， including the U.S. （-1.4 million bales， to 13.1 million）， China （-1.0 million， to 26.0 million）， and India （-500，000 bales to 29.0 million）. Other notable changes to harvest were made for Brazil （+250，000 to 7.0 million）， Australia（+200，000 to 2.2 million）， Pakistan（+200，000 to 10.2 million）， and Uzbekistan （-200，000 to 3.7 million）.

In terms of mill-use， the most significant revisions were part of the change made to historic estimates for Bangladesh. These changes were a result of an analysis of Bangladeshi trade data between 2011/12 and the present. Results suggested that imports， and therefore consumption， were more than one million bales higher than previous estimates in recent crop years. At the world-level， the increase in the Bangladeshi mill-use figure for 2015/16 （+1.1 million bales to 5.7 million） was partially offset by decreases in China （-500，000 bales to 34.0 million）， India （-250，000 bales to 26.0 million）， Pakistan （-100，000 bales to 10.9 million）， and Vietnam （-100，000 bales to 4.7 million）. Slight increases were made to projections for Taiwan（+100，000 bales to 925，000） and Turkey（+100，000 bales to 6.5 million）.

Price outlook

The response by NY futures to the latest USDA release was likely driven by the substantial changes made to figures related to the U.S. It is not uncommon for there to be large revisions to U.S. production estimates in reports released in August. This is because there is a change in methodology used by the USDA between the July and August releases.

From May （when the first complete set of estimates for an upcoming crop year are released） to July， the USDA relies on commodity analysts and statisticians to develop forecasts. In August， and throughout the harvest period， data gathered from field surveys conducted by observers across the cotton belt are used to generate yield and production forecasts. This year， due to heavy rainfall in many cotton growing states， there had been considerable uncertainty related to acreage planted， abandonment， and yield. As a result， the change in methods could have been expected to result in important revisions to existing estimates.

This month， the U.S. planted acreage number was lowered 100，000 acres nationally （from 9.0 to 8.9 million）. Abandonment， which refers to acreage planted but not harvested due to poor crop conditions， was increased from 500，000 acres to 1.0 million acres. The national yield forecast was lowered 27 lbs/acre （3%）. In combination， these changes generated in the 1.4 million bale （10%） 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. A 200，000 bale increase （from 11.0 to 11.2 million） to the 2014/15 export figure contributed to a 500，000 bale reduction to 2014/15 stocks. For 2015/16， the U.S. export estimate was lowered 800，000 bales， from 10.8 to 10.0 million. This reduction was a result of the smaller production number， and the implied tightness in U.S. supplies could emerge as a factor supportive of prices in 2015/16.