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Cotton Prices Dropping on Change in China Policy, Global Bumper Crop

Spot cotton prices have been dropping since the beginning of July on expectations that China will begin releasing its huge reserves of cotton fiber, and on forecasts of weakening demand for apparel in key markets around the world.

The seven-market U.S. average spot price has declined by almost $0.06 in the first two weeks of July, 7 percent below its price at the end of June and $0.17 (20 percent) below the recent high it reached in early May.

China’s reserve policy, which has kept prices above natural market equilibrium levels, has helped farmers but hurt yarn and garment producers. It has also damaged the worldwide competitiveness of the fiber. Many retailers and brands switched to synthetics like polyester and rayon when cotton prices went sky-high three years ago, and have gotten their consumers used to–and even, in some cases, predisposed toward–manmade fabrics since then.

However, China, as the biggest supplier of the world’s apparel, is also the largest user of cotton, and is now sitting on more than half of the world’s reserves of the fiber. Part of the strategy for releasing the reserves, many in the industry believe, is to get back some of its dominance in the fiber, and to help ease the apparel manufacturing cost increases that are causing China to lose key programs to countries like Vietnam and Bangladesh.

A continued drop in cotton prices will no doubt be felt throughout the supply chain, including by synthetic fiber producers.

The U.S. Department of Agriculture, meanwhile, is forecasting global year-end stocks to be higher than last year thanks to better-than expected crop yields and weak demand for key categories like denim, underwear, socks and other apparel. This will serve to further depress prices.

Demand for cotton apparel categories might become stimulated by a reduction in cotton prices that are passed along to consumers. Or, better yet, brands can take now-cheaper cotton and use it to produce higher quality yarns, fabrics and garments, which might actually jump-start the market for better cotton products, and perhaps move the market away from synthetics into a new cotton cycle.