Cotton price forecast: towards a 12% dip amid abundant supplies

Cotton prices have moved sideways in the past few months as investors weigh the demand and supply dynamics in the industry. Cotton was trading at $82 on Thursday, which was about 50% below the highest point in 2022.

Abundant supplies and weak demand

The cotton market is characterized by abundant supplies in 2023 and relatively weak demand internationally. Analysts believe that clothing demand will rise at a slower pace than historical trends this year as inflation remains elevated in most countries.

The situation has been made worse by the fact that the US dollar has jumped against many emerging and developing countries. This means that importing clothing from countries like China, and Vietnam, has become highly expensive for most people. 

Inflation in key consumers like those in Europe will likely be offset by their strengthening currencies. The euro and sterling have all jumped by more than 20% from their lowest levels in 2022. 

Meanwhile, it seems like there will be an abundant supply of cotton this year. As I wrote here, Zimbabwe is expected to more than double its crop this year to 100k tons. Similarly, countries like China, Australia, and Uzbekistan are expected to boost their production by about 700k tons, according to the USDA. 

In its most recent WASDE report, the USDA said that starting stocks were about 900k higher than historical standards. The report added that: 

“World cotton consumption in 2022/23 is 555,000 bales lower this month with reductions in Turkey, Pakistan, Indonesia, and Bangladesh. Projected imports are lower for each of these countries—and for China.”

Cotton prices forecast

Cotton chart by TradingView

The daily chart shows that cotton prices have been in a downward trend in the past few months. In this period, prices dropped from last year’s high of $159.26 to a low of $72.58. The downward trend has eased recently, which has seen the price form a small descending channel shown in orange. 

Cotton’s downward trend is being supported by the 50-day and 100-day exponential moving averages. It is also being supported by the Woodie pivot point. Therefore, with the current supply and demand dynamics, I suspect that prices will soon make a bearish breakout in the next few days. If this happens, the next level to watch will be the second support at $72.