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Cotton Prices to Stay Low in 2012/13

Cotton prices are set to stay low for the next season, according to the International Cotton Advisory Committee. The group blames a “bleak” supply and demand outlook.

Cotton stocks should hit a record 16.4 million tons in 2012/13 – an increase of 17% on last season. This is the result of slow global economic growth, which is causing textile manufacturing and purchases to drop. An additional factor is the falling price of synthetic fiber, and the summer popularity of rayon dresses and manmade bottoms.

Cotton production has failed to adjust to rising stocks and stagnating prices. Some experts contend that cotton has stabilized around its price “floor,” which is generally estimated to be between 70 and 75 cents per pound. This means that farmers are able to meet their production costs, taking away one incentive for switching away from cotton. Government policies in some areas have also contributed to the oversupply by subsidizing unprofitable production, and favorable weather has increased yields.

Cotton production should reach 25.9 million tons in 2012/13, while is expected to stall at 23.4 million tons. The oversupply could push down prices and increase cotton stocks further.

Supply distortions can also be traced to policies in China, which are paying cotton farmers more than the international market price, and guaranteeing purchases up to a certain level. This has impacted the competitiveness of many Chinese mills and has driven some weaving firms to purchase foreign yarn.

Lower Chinese demand should reduce the overall global cotton trade by 21% to 7.7 million tons this year. In 2011/12, China was stockpiling cotton to protect domestic manufacturers against price spikes.

This trend will be countered by an 18% increase in overall global trading, as the global economic recovery continues to improve demand, and exports from markets such as India will decline due to growing domestic consumption.

SJ tracking shows that prices have been stable between 70 and 90 cents per pound for several months. Within this range, most cotton farmers are able to keep growing crops, but have limited incentives to expand production. Currently, March 2013 cotton futures are selling for 70.21 cents/pound.

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