CME Cotton #2 Jul '24 (KGN24)

Description

Cotton is a natural vegetable fiber that comes from small trees and shrubs of a genus belonging to the mallow family, one of which is the common American Upland cotton plant. Cotton has been used in India for at least the last 5,000 years and probably much longer, and was also used by the ancient Chinese, Egyptians, and North and South Americans. Cotton was one of the earliest crops grown by European settlers in the U.S.

Cotton requires a long growing season, plenty of sunshine and water during the growing season, and then dry weather for harvesting. In the United States, the Cotton Belt stretches from northern Florida to North Carolina and westward to California. In the U.S., planting time varies from the beginning of February in Southern Texas to the beginning of June in the northern sections of the Cotton Belt. The flower bud of the plant blossoms and develops into an oval boll that splits open at maturity. At maturity, cotton is most vulnerable to damage from wind and rain. Approximately 95% of the cotton in the U.S. is now harvested mechanically with spindle-type pickers or strippers and then sent off to cotton gins for processing. There it is dried, cleaned, separated, and packed into bales.

Cotton is used in a wide range of products, from clothing to home furnishings to medical products. The value of cotton is determined by the staple, grade, and character of each bale. Staple refers to short, medium, long, or extra-long fiber length, with medium staple accounting for about 70% of all U.S. cotton. Grade refers to the color, brightness, and amount of foreign matter and is established by the U.S. Department of Agriculture. Character refers to the fiber's diameter, strength, body, maturity (ratio of mature to immature fibers), uniformity, and smoothness. Cotton is the fifth leading cash crop in the U.S. and is one of the nation's principal agricultural exports. The weight of cotton is typically measured in terms of a "bale," which equals 480 pounds.

Cotton futures and options are traded at the ICE Futures U.S exchange. Cotton futures are also traded on the B3 exchange and the Multi Commodity Exchange of India, and the Zhengzhou Commodity Exchange. Cotton yarn futures are traded on the Zhengzhou Commodity Exchange. The ICE Futures U.S. exchange's futures contract calls for the delivery of 50,000 pounds net weight (approximately 100 bales) of No. 2 cotton with a quality rating of Strict Low Middling and a staple length of 1-and-2/32 inch. Delivery points include Texas (Galveston and Houston), New Orleans, Memphis, and Greenville/Spartanburg in South Carolina.

Prices - ICE cotton futures prices (Barchart.com symbol CT) moved slightly lower in the first half of 2023. Weak global cotton consumption weighed on prices after the USDA, in its March WASDE report, forecasted that global 2022/23 cotton consumption would fall -5% yr/yr to a 3-year low of 110 million bales. The decline in consumption pushed global cotton ending stocks up to a 3-year high of 91.15 million bales. Weak cotton consumption in Turkey, the world's fifth-biggest cotton importer, weighed on prices after an earthquake shuttered 80% of the country's cotton yarn capacity. The March USDA planting intentions report was bearish for cotton as the USDA estimated US 2023 cotton acreage of 11.3 million acres, above expectations of 11 million acres. Cotton prices recovered into mid-2023 as demand improved after the USDA, in the May WASDE report estimated global 2023/24 cotton consumption of 116.23 million bales, above expectations of 114.79 million bales. Cotton prices posted their high for 2023 in September of 90.75 cents a pound. An El Nino weather event in 2023 was bullish for cotton prices since an El Nino pattern typically brings drought to India, the world's second-biggest cotton producer. In the September WASDE report, the USDA cut its 2023/24 global cotton production estimate to 112.30 million bales, below expectations of 113.50 million bales. However, cotton prices turned lower late in the year and posted the low for 2023 of 74.77 cents a pound in November. Improved growing conditions in the US boosted the US cotton crop as the USDA, in its November WASDE report, projected US cotton production at 13.09 bales, higher than expectations of 12.73 million bales. Also, in December, Cotlook raised its global 2023/24 cotton surplus estimate to 559,000 MT from a November estimate of 188,000 MT. Cotton prices finished 2023 down -2.8% yr/yr at 81.00 cents a pound.

Supply - World cotton production in 2023/24 is forecasted to decrease by -2.9% yr/yr to 113.179 million bales (480 pounds per bale), below the 2011/12 record high of 127.244 million bales. The world's largest cotton producers are forecasted to be China with 24.3% of world production in 2024/25, India with 22.1%, Brazil with 12.9%, the US with 11.0%, and Pakistan with 5.9%. World ending stocks in 2023/24 are forecasted to rise by +1.4% yr/yr to 84.382 million bales, below the 2014/15 record high of 105.293.

The US cotton crop in 2023/24 is forecasted to fall by -14.1% yr/yr to 12.434 million bales, below the 2005/06 record high of 23.890 million bales. US farmers are forecasted to harvest 8.020 million acres of cotton in 2023/24, up by +9.8% yr/yr. The US cotton yield in 2023/24 is forecasted to fall by -19.5% yr/yr to 765 pounds per acre, below the 2022/23 record high of 950 pounds per acre. The leading US producing states for cotton in 2023 were Texas with 24.5% of US production, Georgia with 18.4%, Arkansas with 11.0%, Missouri with 7.1%, Mississippi with 6.7%, North Carolina with 5.8%, and Alabama with 5.6%.

Demand - World cotton consumption in 2023/24 is forecasted to rise by +1.1% yr/yr to 112.425 million bales. The largest consumers of cotton in 2023/24 are expected to be China with 32.5% of the world total, India with 21.1%, and Pakistan with 8.7%. The US consumption of cotton by mills in 2023/24 is expected to fall by -7.3% yr/yr to 1.900 million bales.

Trade - World exports of cotton in 2023/24 are expected to rise by +16.5% yr/yr to 43.052 million bales, below the record high of 48.999 million bales posted in 2020/21. Major world cotton importers for 2023/24 are expected to be China with 26.7% of total world imports, Bangladesh with 18.6%, Vietnam with 15.6%, Turkey with 9.5%, and Pakistan with 8.8%.

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