Cotton prices have struggled to gain traction this year as demand and supply divergences continued. It was trading at $79.32 on Tuesday, a few points above the year-to-date low of $76.20. Cotton remains about 14% below the highest point in 2023 and 43% lower than its 2022 high.
Weak demand and higher suppliesCotton and other commodities are going through a mixed period in 2023. Some soft commodities like soybeans, corn, and wheat have crashed hard as supplies have remained at an elevated level.
Other commodities like palm oil, sugar, and orange juice have jumped because of weather-related issues. For example, orange juice has soared because of weak production in Florida, which has faced numerous hurricanes.
Cotton is seeing higher production and lower demand in key markets. Demand has dropped because of the ongoing high inflation in key markets like the US, UK, and in the euro area. Higher inflation has led to elevated interest rates, which has curtailed consumer spending.
At the same time, there is abundant cotton supply. According to the USDA, the US is expected to produce 13.1 million bales this year, 273k bales higher than the previous estimate. While Texas production has dropped, it has been offset by other states.
Internationally, countries like Afghanistan, United States, Argentina, and Paraguay are expected to have higher supplies. This increase will offset the decline of production in countries like Spain and Mexico.
At the same time, cotton use is expected to remain under pressure. In the US, mill use is expected to be 100k bales lower while globally, it will be about 500k lower. The WASDE report said:
“Global consumption is 500,000 bales lower, with cuts for Vietnam, Turkey, and the United States. World trade is little changed from the previous month despite a 500,000-bale increase in China’s projected imports, as declines for Vietnam, Turkey, Korea, and Thailand are largely offsetting.”
Cotton prices forecast
Turning to the daily chart, we see that cotton prices have been under pressure recently. It was trading at $80, lower than the YTD high of $92.66. This price is also a few points above the YTD low of $76.20. It has formed a small bearish flag pattern and moved below the 50-day and 25-day moving averages.
Cotton has remained below the 23.6% Fibonacci Retracement level. Therefore, it seems like the price will continue falling, with the next point to watch being at $70.5, the lowest point in 2022. This view will be confirmed if it moves below the support at $76.20.
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