On March 5 the Indian government announced that it was banning all cotton exports, effective immediately. Shipments of 7.7 million bales in the 2011-12 marketing year had already shot past original export estimates of 6.8 million bales. An additional 2 million bales that were contracted for shipment were not at issue, because exporters would be allowed to honor all commitments. The government felt it needed to ensure that supplies would be available to feed the domestic mill industry.
China, Bangladesh and India’s other customers would have to look elsewhere for new purchases. With the possibility that US stocks would be run down to historically low levels, prices closed up the daily trading limit in the session following the announcement of the ban.
The bullishness was short lived, though. There was no follow-through to the rally, as the market closed lower the next day. Estimates for global ending stocks have been swelling in recent months. In December, the USDA estimate for the 2011-12 carryout was 51.8% of usage, but the March 9 monthly crop report showed that the figure had climbed up to 57.3%. Production forecasts remained steady, but consumption estimates fell by about 2.5%. So while it was quite likely that US stocks would be run down further if there were substantial interest in old-crop cotton, in the grand scheme there is still plenty of supply available before the new crop is harvested this coming autumn.
In any case, it all became a moot point, because by March 11 the ban was lifted as the government yielded to pressure from China and other concerned parties. The market proceeded to new lows for the move.
Looking at other areas, we find that US exports have been steady. We were surprised that in the March crop report the USDA did not raise its 2011-12 forecast from its 11-million-bale estimate. Commitments have already reached that level, and there are over four months remaining to the marketing year. In addition, the shipment pace has been excellent. Shipments need to average 271,000 bales per week to meet the USDA target. Average shipments over the past four weeks have been 340,000 bales.
The other bullish wrinkle for this market is that prices have been falling relative to the other major agricultural commodities. Although we won’t get a clear picture for a while yet, it is fair to say that acreage would have been switched away from cotton where possible. The starkest example is soybeans. Chart 2 shows new-crop soybeans soaring vis-à-vis new-crop cotton. China is the world’s largest cotton producer, and 2012-13 output will be similarly affected. Chinese cotton area is expected to fall by 10%.
The motivation for the Indian export ban was far from ludicrous. Ever since India became a self-sufficient cotton producer in the mid-2000s, inventories have been ample, with ending stocks averaging about 35% of domestic consumption. After this season’s export spree, the carryover has been revised downwards and is roughly 20% of usage.
In conclusion, while the USDA balance sheet is telling us that this is a bear market, the demand side developments are not adequately reflected. The flip-flop on Indian exports may have resulted in cotton becoming available, but it also highlights strong mill usage in India and in Asian importing countries. Demand has not recovered to pre-recession levels, which reached 118 million bales in 2009-10, but it is not as weak as the current estimate. In all likelihood, we’re probably closer to the early season forecasts.
We continue to believe that prices will drift lower, but it is highly improbable that prices will plunge. Lower buy stops on December cotton to 91.5¢ per pound from the 95¢ per pound stop recommended on February 23.