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Why Cotton Prices Will Likely Stay at Record Lows Even When Demand Returns

While there might be a pent-up demand if and when the global and U.S. economies are jolted back to life, there’s also going to be a glut of supply, meaning cotton prices likely won’t see any rebound from record low levels, Cotton Incorporated said in a new report.

Many companies hit by the coronavirus pandemic in the U.S. and Europe have set plans to restrain spending and preserve cash, meaning lean inventories when the eventual recovery arrives, Cotton Inc. noted. Unlike the recovery that followed the last global recession, when low manufacturer and retailer inventories were paired with a surge in demand as economic conditions began to improve and cotton prices spiked, when the current global coronavirus pandemic subsides and business activity picks up, the group anticipates a surge in demand through emptied supply chains.

Cotton Inc. said cotton fiber supplies should be plentiful in the recovery that eventually surfaces. Due to high prices for corn and soybeans and low prices for cotton, global cotton acreage and production declined successively in the three years before the spike. This caused the global stocks-to-use ratio to drop to below 40 percent in 2009-10. In contrast, the current stocks-to-use ratio for 2019-20 is 83 percent, indicating more than double the level of available supply relative to use.

The U.S. Department of Agriculture (USDA) released planting estimates for the U.S. at the end of March suggesting U.S. acres would be nearly unchanged year-over-year. If a similar pattern is maintained in other major producing countries for 2020-21, another major surplus could emerge next crop year, Cotton Inc. said.

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Specifically, the USDA report featured a record downward adjustment to demand. Global mill use was lowered 7.6 million bales relative to last month to 110.6 million bales. If realized, this would be the lowest level since 2013-14, when, following the price spike, mill use was below 110 million bales between 2011-12 and 2013-14.

“Such a surplus, when added to the high level of 2019-20 ending stocks that will be carried forward, makes the prospect of another price spike in the economic recovery that follows the current crisis appear unlikely,” the report said. “Nonetheless, significant upward pressure may develop in garment sourcing costs. This upward pressure could result from competition for order completion. Competition can be expected to result from the traditional surge in demand through supply chains with lean inventories.”

However, the current downturn is already remarkable for the “depth of its descent,” Cotton Inc. said. This could be compounded by the likelihood that there might be fewer textile manufacturers in business to take orders.

“It remains to be seen what support measures may be offered to emerging markets and how many manufacturers in those countries may be forced to close,” the report said. “If closures are widespread, global manufacturing capacity may require several years to rebuild.”

This comes as supply has already outstripped demand. All benchmark prices fell over the past month, said the April 10 report. The May New York futures contract dropped to 53 cents per pound from 61 cents, and the Cotlook A Index, an average of global prices, fell to 64 cents from 72 cents.

U.S. spot cotton prices averaged 47.85 cents per pound for the week ended April 9. The weekly average was up from 45.13 the prior week, but down from 72.51 cents a year earlier.