Both NY and ‘A’ Index prices have fallen sharply in September and have reached twelve-month lows. A rising dollar, high levels of cotton stocks, and a general retreat of speculative monies from commodities markets all contributed to the declines. Perhaps most influential, however, has been an increasingly gloomy global economic outlook that threatens consumer purchases at retail and reduces demand for cotton. While the revised figure for quarter-over-quarter growth in U.S. GDP in the second quarter was higher than expected (+3.3%), much of the increase has been attributed to transient effects of tax rebates and the economic stimulus. Significantly lower growth rates are expected in the next two quarters and major weights on the U.S. economy continue to include falling housing and stock prices, tight credit conditions, and a rising unemployment rate (up 0.4 in August to 6.1%, the highest level in 5 years). Each of these factors contributes to low consumer confidence, which has affected spending (year-over-year growth in apparel spending was 0.71% in July compared to a 10-year average of 5.05%). Other major consumer economies are also slowing. In the second quarter of 2008, the euro zone witnessed its first negative quarter-over-quarter growth (-0.2%) since its inception. Japan’s quarter-over-quarter GDP growth was also negative (-0.3%). With these major consumer economies weak, global purchases of apparel and home textile goods can be expected to fall and affect mill demand for cotton.

Correspondingly, the USDA’s September report included a slight downward revision for worldwide consumption (-840,000 bales or 0.01%). Countries with the greatest changes to their consumption estimates were China (-500,000), India (-200,000), Pakistan (-200,000), and Turkey (-100,000). The downward revision in Chinese consumption for 2008/09, combined with a significant upward revision for Chinese production in 2007/08 (+1.2 million bales), contributed to a 1 million bale drop in estimated Chinese imports for 2008/09. Among the countries with balance sheets affected by the drop in Chinese imports was the United States, whose expected exports fell 500,000 bales and whose ending stocks estimate rose 300,000 bales. Across the globe production estimates were largely flat with the largest alterations being a 500,000 bale increase for India which was offset by a 400,000 bale decrease in Pakistan.

With production estimates flat and projections for consumption slightly down, this month’s report represents a mild loosening in a marketing year that was largely expected to be dominated by tight fundamentals. In the immediate near term, stocks in the U.S. are at a 40-year high and should continue to have a downward influence on prices. Previous estimates for U.S. stocks-to-use for the 2008/09 crop year successively tightened month to month from 28.0% in June to 24.0% in August. Given the global economic slowdown, this month’s stocks-to-use estimate represented a reversal in the trend and was up slightly up to 26.0%. Given the bleak outlook for the global economy, these ratios may continue to loosen and inhibit strengthening in prices. However, 2008/09 U.S. and global stocks-to-use ratio estimates are significantly down relative to 2007/08. The current U.S. figure (26.0%) is less than half 2007/08’s number (56.0%) and the global stocks-to-use ratio is down from 48.8% in 2007/08 to 42.3% in 2008/09. As stocks move lower in upcoming months, there will be bullish pressure on prices in the longer term. However, with a weak global economy, this upward pressure on prices will be lessened by slowing demand.