While dramatically lower than just three months ago (NY Nearby -30.8% and A Index -35.7% since Sept.1, 2008), cotton prices appear to have stabilized in the second half of November. After testing levels below 40 cents/lb during November, the March ‘09 contract has since rebounded to a range around 45 cents/lb.  Likewise, the December ‘09 contract twice tested levels under 46 cents/lb and has since recovered to a slightly higher range around 48 cents/lb.  The A Index mirrored the pattern of NY futures, moving from a low of 51.80 cents/lb (Nov. 21) to prices over 57 cents/lb before returning back to its current level under 55 cents/lb. The recent halt in the decline in prices may be a result of governmental efforts to support prices by reducing available supply by purchasing cotton and placing it in state-controlled reserves.  China recently announced a plan to purchase an additional 6.9 million bales of cotton (on top of the 5.6 million bales already announced).  India announced a similar plan to purchase up to 7 million bales.  Combined, these two sets of purchases represent almost 20% of the entire world’s production in 2008/09 (111.6 million bales). 

As in recent months, the December USDA report is dominated by downward revisions to consumption figures.  December’s estimate for worldwide consumption is 2.7 million bales less than it was last month.  More than half of this revision resulted from changes in expected cotton use by China (-1.5 million bales) although there were also important decreases in the estimates for India (-500,000), Pakistan (-200,000), and Turkey (-200,000).  Changes in consumption generally imply revisions in trade figures and the import estimates for China (-1.5 million bales), Pakistan               (-300,000), and Turkey (-300,000) all decreased.  The reduction in import demand is expected to affect export shipments from India (-900,000 bales), the United States (-750,000), and Uzbekistan (-250,000).  Production estimates were also revised downward in the current report with most of the global reduction (-1.3 million bales) resulting from a drop in the expected harvest from India (-1.0 million).  There were also reductions in the projected crops from Brazil (-450,000 bales) and Uzbekistan (-100,000) while there was an increase in projected production from Pakistan (+400,000). 

With the decrease in the consumption figure exceeding the decrease in the production estimate, the projection for ending stocks increased 1.4 million bales.  This increase, along with slowing demand, resulted in first global stocks-to-use ratio (50.4%) for 2008/09 that is greater than that from 2007/08 (49.7%).  Loosening in stocks-to-use ratios have occurred in each recent recessionary period (+9.1 percentage points in 1981/82, +3.3 in 1990/91, +4.5 in 2001/02) and several sources are pointing to further loosening this crop year due to the relative severity of the current economic downturn.  With reductions in both consumption and exports estimates, the U.S. stocks-to-use ratio increased from 35.6% to 42.9%.  Hampered by rising unemployment rates, consumer confidence remains at historical lows in many major consumer economies and suggests that weak consumer spending is likely to continue.  Meanwhile, there is mounting evidence of deterioration in emerging economies and growth estimates are being revised downwards for developing countries originally believed capable of weathering the economic crisis.  A result will be continued weakness in demand for cotton that is likely to further loosen fundamentals and result in renewed downward pressure on prices.