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Insight | Time: Aug 13 2019 10:15AM
Competitiveness of Brazilian cotton strengthens with higher output and price edge
 
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Brazilian cotton output is expected to rise largely, while in the meantime, global cotton consumption continues to weaken, so the oversupplied situation of Brazilian cotton during the harvest period is more obvious, and there is still downward space for cotton prices later. However, the trade friction makes China cotton imports from Brazil increase evidently. Besides, the Brazilian cotton has obvious price edge among cleared foreign cotton.

1. Obvious supply glut of Brazilian cotton
According to the data released by CONAB in July, 2018/19 Brazilian cotton output may reach 2.665 million tons, up by 32.9% year on year, to hit a historical high. Exports may move up by 60.3% to 1.5 million tons, above 1 million tons for the first time. Domestic consumption is likely to rise by 2.9% to 0.7 million tons. Therefore, ending stocks may rise by 70.7% to 1.135 million tons, for the first time to be above 1 million tons since 2011. The large increase of cotton output makes the supply glut more obvious. Compared with the data released in June, the consumption and exports are revised lower somewhat, leading to higher ending stocks. In early Aug, global stock and commodity market turns bearish, and CONAB is likely to revise lower the consumption and exports in Aug. Under the continual weakness of global cotton textile industrial chain, the supply glut of Brazilian cotton is more obvious with higher cotton output.
Brazilian cotton supply and demand (CONAB, unit: KT)
Date Beginning stock Output Import Total supply Consumption Export Ending stock
2011/12 521.7 1,893.3 3.5 2,418.5 895.2 1,052.8 470.5
2012/13 470.5 1,310.3 17.4 1,798.2 920.2 572.9 305.1
2013/14 305.1 1,734.0 31.5 2,070.6 883.5 748.6 438.5
2014/15 438.5 1,562.8 2.1 2,003.4 820.0 834.3 349.1
2015/16 349.1 1,289.2 27.0 1,665.3 660.0 804.0 201.3
2016/17 201.3 1,529.5 33.6 1,764.4 685.0 834.1 245.3
2017/18 245.3 2,005.8 30.0 2,281.1 680.0 936.0 665.1
2018/19 Jun/19 665.1 2,664.5 5.0 3,334.6 720.0 1,650.0 964.6
Jul/19 665.1 2,665.1 5.0 3,335.2 700.0 1,500.0 1,135.2
Monthly change 0.00% 0.02% 0.00% 0.02% -2.78% -9.09% 17.69%
Yearly change 171.14% 32.87% -83.33% 46.21% 2.94% 60.26% 70.68%


In details, cotton areas in Brazil rose by 36.2% year on year, and in the major cotton producing areas, Mato Grosso and Minas Gerais, areas increased by 38.3% and 68% respectively. For yield, the average level moved lower slightly by 2.5% to 1665 kg per hectare, but the higher areas stimulated the higher cotton output.
Brazilian cotton areas and output (Jul, 2019)
Region areas (1,000 hectares) yield (KG per hectare) Output (1,000 tons)
2017/18 2018/19 growth rate 2017/18 2018/19 growth rate 2017/18 2018/19 growth rate
Northern area 7.6 14.7 93.4% 1561 1633 4.6% 11.9 24 101.7%
PR 4.8 6 25.0% 1596 1756 10.0% 7.7 10.5 36.4%
RO - 4.5 - - 1425 - - 6.4 -
TO 2.8 4.2 48.5% 1500 1680 12.0% 4.2 7.1 69.0%
Northeast area 295.2 377.8 28.0% 1850 1740 -5.9% 546.2 657.5 20.4%
MA 22.3 27.7 24.2% 1565 1654 5.7% 34.9 45.8 31.2%
PI 7.2 16.1 123.6% 1656 1677 1.3% 11.9 27 126.9%
CE 1.2 0.9 -25.0% 286 290 1.4% 0.3 0.3 -
RN 0.3 0.3 0.0% 1695 1495 -11.8% 0.5 0.4 -20.0%
PB 0.5 0.8 60.0% 322 370 15.1% 0.2 0.3 50.0%
BA 263.7 332 25.9% 1890 1758 -7.0% 498.4 583.7 17.1%
Central area 841.2 1155.1 37.3% 1664 1642 -1.3% 1399.6 1896.2 35.5%
MT 777.8 1075.7 38.3% 1659 1641 -1.1% 1290.2 1765 36.8%
MS 30.4 37 21.7% 1845 1650 -10.6% 56.1 61 8.7%
GO 33 42.4 28.5% 1615 1655 2.4% 53.3 70.2 31.7%
Southeast area 30.7 51.9 69.1% 1567 1668 6.5% 48.1 86.6 80.0%
MG 25 42 68.0% 1586 1676 5.6% 39.7 70.4 77.3%
SP 5.7 9.9 72.9% 1482 1637 10.4% 8.4 16.2 92.9%
Southern area - 0.7   - 117 - - 0.8 -
PR - 0.7 - - 117 - - 0.8 -
Northeast area 302.8 392.5 29.6% 1843 1736 -5.8% 558.1 681.5 22.1%
Central and southern areas 871.9 1207.7 38.5% 1660 1642 -1.1% 1447.7 1983.6 37.0%
Total 1174.7 1600.2 36.2% 1708 1665 -2.5% 2005.8 2665.1 32.9%


Currently, it is still the harvest period for Brazilian cotton, and US cotton crop is setting bolls. China will start the picking in Sep in earliest, and the harvests will be around Nov in India. For the largest four cotton producers in the world, Brazilian new cotton supply is quite ample at present.
Global cotton crop growing calendar
Country Proportion of output Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
India 23.80% harvests planting     harvests
China 22.10%       planting       harvests    
US 17.10%       planting     bolls setting harvests  
Brazil (7.5%) Central-South planting       harvests         planting
Northeast   planting       harvests        
Pakistan 6.70%         planting     harvests
West Africa 5.00%       harvests       planting    
Turkey 3.00%     planting         harvests
Australia 3.90%     harvests       planting  
Greece 0.80%     planting             harvests  


2. Price edge of Brazilian cotton is showed
The higher cotton output weighs on Brazilian cotton prices. Its spot cotton index has been in a historical low level. Based on its seasonality, Brazilian cotton prices have downward space, and may stabilize till mid-Nov.

Viewed from international cotton prices, except US and Pakistani cotton, Brazilian cotton is the cheapest cotton in the world at present. US cotton exports keep the negative growth, and the export sales of 2019/20 cotton decrease by 28% year on year. Pakistani cotton prices are relatively firm, but affected by exchange rate, USD price has more edge. Nevertheless, the competitiveness of Pakistani cotton weakens recently, as the government tends to impose sales tax on cotton and cotton yarn. The weak Brazilian cotton prices caused by higher cotton output enhances its competitiveness in international market.

In fact, China has imported large quantity of Brazilian cotton from the fourth quarter of 2018, especially in Jan, 2019, cotton imports have reached 136kt, and then fell down. Now, the cotton imports from Brazil keep at about 20kt. The US cotton has been replaced by Brazilian cotton on large quantity.

With the significant imports of Brazilian cotton, bonded cotton inventory continues to be high. Among the spot cleared foreign cotton, Brazilian cotton is mainly sold by on-call terms. With the continual weakness of ZCE cotton futures since May, the on-call Brazilian cotton has obvious price edge. On Aug 6, Brazilian cotton prices were the cheapest among the all imported cotton, and its competitiveness enhances obviously.

Brazilian cotton output is expected to rise largely, while in the meantime, global cotton consumption continues to weaken, so the oversupplied situation of Brazilian cotton during the harvest period is more obvious, and there is still downward space for cotton prices later. However, the trade friction makes China cotton imports from Brazil increase evidently. Besides, the Brazilian cotton has obvious price edge among cleared foreign cotton. The market shares of Brazilian cotton in China are supposed to rise.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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