The April USDA forecast has world cotton consumption down 7.6 million bales (or 6.4%) from last month, the largest monthly change in consumption in USDA’s database. The unprecedented reduction is driven by the rapidly developing impacts of Covid-19 on countries around the world. It represents a loss of about 3-and-a-half weeks of global spinning or about 16% of the expected spinning March through July based on the March USDA forecasts.
Covid-19-driven changes in behavior and regulations are significantly impacting the supply chain of the cotton sector. For example, cotton spinning in China fell by upwards of 90% during the height of the crisis in early March. Recent travel restrictions in India, Pakistan, and Vietnam are likely to have similar impacts on cotton supply and demand in the short-term.
While spinning and other manufacturing sectors in China have begun to recover to some extent, the decline in consumers’ global consumption of apparel is expected to limit any dramatic global recovery for spinners in this marketing year. The extent and length of the shutdowns of spinning mills in China, where Covid-19 arrived earlier, provides some basis for extrapolating impacts in other major cotton spinning countries such as India, Bangladesh, and Vietnam, as disruptions in the supply chain follow the spread of the virus. Reductions in consumption this month are spread across all consuming countries of note.
In addition to physical disruption across the global supply chain from farm to retailer, global cotton endues (i.e., world retail sales of clothing and textiles) has plummeted amidst large portions of the global population limiting activity outside their homes and/or confined by stay-at-home orders and with many “non-essential” businesses including apparel stores closed. The two largest importers of apparel, the European Union and the United States, have seen widespread closure of shopping malls and retail stores, while three-quarters of the US population are under travel restrictions. US unemployment is rising at an unprecedented rate, leaving less income devoted to discretionary items such as apparel.
Spending on clothing is highly correlated to changes in GDP. With expectations for unprecedented declines in global GDP for the first half of CY 2020, weak consumer demand is forecast to persist and negatively impact cotton demand. Retailers are responding to rapid declines in consumer spending by reducing and canceling orders for textiles and apparel worldwide. The severity and timing of consumer “demand destruction” will likely dictate how significant cotton consumption declines in the current marketing year and how long it may persist into 2020/21.
Cotton prices have declined significantly in recent weeks, with the nearby ICE futures contract falling below 50 cents for the first time in over a decade. This has pressured spinners as higher-priced cotton purchased earlier in the season arrives when current prices are now 10 to 20 cents lower. Prices are expected to remain pressured with global consumption forecast at a 6-year low, world ending stocks at their highest level in five years, and stocks outside of China 25% above the previous record.
Cotton in April
For 2019/20, the April forecast shows dramatically lower consumption and trade with sharply higher ending stocks. Consumption has been lowered in all significant markets due to the effects of COVID-19. Lower global trade reflects these downward revisions in major consuming countries; with production and beginning stocks up marginally, ending stocks are up more than 8%. The US forecast has lower exports and consumption with higher ending stocks. The US season-average farm price is lowered 1 cent to 59 cents per pound.
The A-index and US spot price have continued their downward momentum from last month and are down roughly 25% from January. Concerns over the COVID-19 outbreak have further depressed demand & slowed global business activity.