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Cotton Set for 2012/13 Volatility, Say Analysts

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Drought in the United States and a delayed monsoon season in India are taking a toll on cotton forecasts, industry reports indicate. At the same time, demand is falling in developed markets and rising in developing markets. These contradictory trends mean the overall market will be tumultuous in 2013, according to multiple reports by analysts.

In the short term, prices are forecast to rise, as the delayed monsoon crunches short term stocks, but long term forecasts indicate downward trends for cotton prices on higher stocks, despite higher demand in the developing world.

The International Cotton Advisory Committee released a report yesterday predicting cotton production will be 24.74 million tons for the year started Aug. 1, down from 24.87 million forecast last month. Demand estimates have fallen from 25.53 million tons to 23.17 million tons. Supply is now predicted to exceed demand, supporting the idea that cotton prices will decline through the first planting season of the year. Continued low prices will prompt farmers to choose not to plant in the second half of the 2012/13 growing year, which would reverse the trend.

Production in China is expected to fall by almost 3 million bales, eliminating all the gains of 2011/12 and returning production to 2010 levels. The change is due to rising labor costs and lower cotton prices, as many farmers switch to grain.

Production in the US was forecast to increase by 1.5 million bales, but is now expected to fall by 1.2 million due to drought. India, Pakistan, Brazil, and Australia are all forecasting declines of between 2% and 6%, largely due to lower cotton prices and bad weather.

Despite grim news about supplies, world cotton stockpiles are set to rise by 2.2% – a testament to falling demand. Chinese stockpiles almost tripled last year to more than 6 million tons, as exporters sought a cushion against volatility.

“The projected accumulation of cotton stocks will weigh on international cotton prices,” ICAC said. “The extent of this downward pressure will depend in large part on how the Chinese national reserve is handled and on the timing and amount of additional import quotas.”

Farmers are sensitive to the negative trends and are responding by planning to plant fewer acres.

“Anything less than a dollar a pound for cotton is not going to draw much interest,” said Professor O.A. Cleveland, speaking on the Ag Market Network’s July conference call. “With soybeans at $17 and corn at $8, you’re going to see wholesale switching to soybeans and corn.”

Analysts on the call predict maximum cotton prices for 2013 of around 90 cents per pound, stating that a more realistic range will be between 65 cents and 80 cents. Those prices will benefit makers of big-four staples such as cotton trousers, blouses, and underwear.

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