by Cotton Incorporated

Recent price movement

Most benchmark prices decreased over the past month. Chinese prices moved sharply lower.

？ Open interest has shifted from July and into the December contract. After moving lower in early May， values for the July contract were volatile but rangebound between 65 and 70 cents/lb for most of the past month. Values for the December contract also moved lower in early May. While they had been rangebound， December prices have been testing the lower end of their recent range， briefly dropping below 65 cents/lb in the latest trading.

？ The A Index fell in early May， but has been more stable in recent weeks， holding to levels between 76 to 81 cents/lb.

？ The China Cotton Index （CC Index 3128B） posted its sharpest declines in nearly five years. In international terms， values decreased from 104 to 92 cents/ lb （-12%）. In domestic terms， values fell from 15，600 to 14，000 RMB/ton （-10%）.

？ Indian cotton prices （Shankar-6 quality） were stable， generally holding to values near 83 cents/lb in international terms and near 45，000 INR/candy in domestic terms.

？ Pakistani prices fell from 76 to 71 cents/lb in international terms but were stable in domestic terms （near 8，800 PKR/maund）. The decrease expressed in USD was a result of the PKR falling about 5% against the dollar since early May.

Supply， demand， & trade

The latest USDA report featured slight reductions to forecasts for world production and mill-use in the upcoming 2019/20 crop year. The global production number decreased 137，000 bales（from 125.5 to 125.3 million）. The global consumption forecast decreased 660，000 bales （from 125.9 to 125.3 million）.

For the soon to be completed 2018/19 crop year， the global production estimate increased （+435，000 bales， to 118.9 million） and the mill-use estimate decreased （-400，000 bales， to 122.3 million）. This lifted the figure for 2018/19 world ending stocks （+1.1 million bales， to 77.5 million） and resulted in a corresponding increase to 2019/20 beginning stocks.

In combination， the smaller decrease in 2019/20 production （-137，000 bales） relative to 2019/20 mill-use （-660，000 bales） and the increase in 2019/20 beginning stocks pushed the forecast for 2019/20 ending stocks higher than last months number （+1.6 million bales， from 75.7 to 77.3 million）. This additional warehoused supply was almost evenly allocated between China （+750，000， to 31.5 million bales of ending stocks in 2019/20） and the rest of the world（+820，000， to 45.8 million bales of ending stocks in 2019/20）. In terms of annual change， 2019/20 is expected to be fifth consecutive crop year that Chinese stocks decrease and the fourth consecutive crop year that stocks outside China will increase.

At the country level， the largest change to 2018/19 production figures was a 500，000 bale increase for India （to 26.0 million）. Notable revisions 2019/20 harvest projections included the 300，000 bale reduction for Australia （to 1.9 million） and the 125，000 bale addition for Uzbekistan （to 3.3 million）.

The largest change to 2018/19 milluse figures was for China （-500，000 bales， to 40.0 million）. Notable revisions to 2019/20 forecasts for consumption also included a 500，000 reduction for China（to 41.0 million） as well as 100，000 bale decreases for Bangladesh （to 8.3 million） and Vietnam （to 7.5 million）.

For trade in 2019/20， the largest changes included a 600，000 bale decrease in Australian exports （to 1.8 million）， a 300，000 bale increase in Indian exports（to 4.8 million）， a 500，000 bale decrease in Chinese imports （to 10.5 million）， and a 100，000 bale decrease in Bangladeshi imports （to 8.3 million）.

Price outlook

A central source of uncertainty for the cotton market remains the trade situation between the U.S. and China. These two countries represent not only the worlds largest exporter and importer of cotton fiber， but are also the worlds largest exporter and importer of apparel and the worlds two largest economies.

China implemented a 25 percentage point increase in imports of U.S. cotton fiber last July. In the ten months of trade data that have become available since then， there has been a definite shift away from the U.S. Chinese imports from all locations rose 80% （weight basis） year-overyear July-April. Non-U.S. machine picking countries have benefitted the most in terms of volume. Chinese imports from both Brazil and Australia were up 1.5 million bales year-over-year July-April （up 396% and 153% respectively）. Strong increases have also been registered from hand picking sources. Chinese imports from India were up 1.0 million bales or 325% year-over-year July-April， and shipments from other sources （mainly West Africa） were up 550，000 bales or +108%. Over the same time period， Chinese imports from the U.S. dropped 868，000 bales or -44%.

The U.S. has yet to increase tariffs on apparel imports from China. However， in early May， the president threatened to raise duties on all goods from China that have not been covered by previous increases. This would include U.S. imports of Chinese apparel and home textiles（HS Chapters 61， 62， and 63 have been excluded so far）. Threats to hit the entirety of U.S. imports from China were initially made last summer. In the nearly twelve months since those threats were made， there has been little change in Chinas share of U.S. apparel imports. In the first four months of 2019， U.S. apparel imports from China increased 2% （in terms of square meter equivalence）.

Beyond the direct effects that the trade dispute has on global fiber and apparel markets， there are also indirect macroeconomic consequences. If tariff increases are extended to cover all U.S. consumer goods imported from China， U.S. retail prices could increase and demand across product categories could fall. From the U.S.， this suggests smaller retailer orders. For China， this suggests smaller manufacturer orders. With Chinese manufacturers serving as a source of demand globally， this could mean less demand for raw materials and intermediate goods around the world and feed into a vicious cycle of slowing economic growth.