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Editorial: If Cotton Stages A Comeback in 2014, It Will Be By The Numbers

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Sisyphus. The French Algerian writer Albert Camus popularized the fate of Sisyphus in his famous essay, “The Myth of Sisyphus.” According to Greek mythology, Sisyphus was condemned to forever push a rock up a hill only to have it roll back down time and again. The poor guy was locked in this perpetual struggle — a metaphor for the absurdity of life, said Camus.

So what can we learn from the plight of Sisyphus? In its simplest meaning, whatever goes up must come down. In today’s terms, that can easily apply to markets. Talk about absurdity — take a look at cotton prices. Going up and down like Sisyphus’s rock. After months of soaring prices, it appears that cotton prices may be easing. But the big question is for how long?

Cotton has an image problem. It’s bad enough for the old fiber that it has to compete against the performance characteristics of synthetics, but now there are questions about how cotton is priced on the world market. Costs are incredibly important to textile companies, so fiber prices are more important than ever. Tracking the cost of cotton–and determining the best time to buy cotton–is often an exercise in confusion and frustration. Prices change, due to a host of factors, and buying at one time versus another can mean the difference between paying less than $1 per pound to paying well over $2 per pound.

Brands and mills have two questions about cotton. The first is whether or not the price of cotton will go higher or lower. The second is why the price of cotton in the United States is different from the price in China. Or India? Or Pakistan? Or, pick a country? The fact is that cotton prices can and do vary widely around the globe, much like the cut of clothes varies from brand to brand. As of this writing, the price for cotton in New York is about 85 cents per pound, while in Delhi the price is over $1 per pound and in Shanghai over $1.30. Which is the correct price? The answer is: They all are.

There are numerous types of cotton grown around the world. To name just a few, there are Texas FiberMax®, Memphis Eastern, Egyptian, Pima, Supima, Australian, SJV, Shankar 6, West African,  and Xinjiang, with many subtypes of cotton within each major cotton-growing region. Because of this complexity, growing patterns can easily change from season to season as farmers try to select those types of cotton most likely to give them the most return on their investment. Moreover, farmers may opt to grow other crops, such as corn or soybeans, in addition to or instead of cotton. If alternate crops take available acres away from cotton, prices can be significantly affected.

Weather adds another layer of uncertainty. Droughts and excessive rainfall can dramatically affect the cost of cotton. For instance, the price run-up that occurred in 2011 was due, in part, to flooding in Pakistan that wiped out much of the domestic cotton crop there. In turn, this forced local mills to import cotton from the United States and elsewhere, which created more demand–and thus higher prices–than would otherwise have been the case. Add to this the lack of a centralized, global cotton market. Instead, each market acts independently, according to government policies, allowing local supply-and-demand issues to skew the price of cotton from country to country.

As a case in point, in 2011, the government of India, looking to lower cotton prices for Indian textile mills, imposed an export quota. In effect, this action took one of the largest producers of cotton out of the global market. Cotton soared to over $2 per pound everywhere, except in India, of course, where cotton prices fell. And this year, the government of China has purchased and stored huge quantities of cotton–some estimates put the Chinese reserve at more than half of the world’s cotton–in an effort to help prop up the price of Chinese-grown cotton. This action has had the result of taking a sizable percentage of the global available supply of cotton off-line. With reduced global supply, prices in New York, for example, have risen from about 65 cents per pound to about 85 cents per pound.

Contributing another layer of uncertainty are futures exchanges. There are relatively few cotton futures contracts around the world, so hedging against price hikes or declines is difficult from a global perspective. In theory, there is a way to hedge costs over the long haul by using Intercontinental Exchange (ICE) futures prices as a guide. Although ICE only tracks one style of cotton, futures prices all other styles of cotton depending upon quality and availability. Higher-value cotton, in essence, has a way of finding a futures price. Futures exchanges are essential in establishing some basic level of price discovery. There is a problem, though: Not all companies around the world are permitted by their governments to trade futures. Local exchanges have sprouted up to help fill the need–for example, the MCX in India and ZCE in China–but these exchanges track local prices and are not representative of broader, global price levels.

All of this can leave mills and brands not only confused and frustrated but also vulnerable. As there is no really true way to measure the global price of cotton other than the ICE price, which acts as a surrogate for global prices, there is no simple way of tracking the global price of cotton other than to become a terrific market researcher. When looking at the global market for cotton, buyers have to consider complexity, crop competition, weather, government actions and futures exchanges. The best tool that sourcing companies have to wade through this flood of conflicting forces is to anchor themselves by gathering as much information about the market as possible.

There are a variety of information sources that allow cotton consumers to keep abreast of the global (and local) market for cotton, some of which are free to subscribers. First is Cotton Outlook (www.cotlook.com), which tracks the latest in prices around the world. Another is the International Cotton Advisory Committee website (www.icac.org), which tracks the latest global supply-and-demand estimates and forecasts. Of course, the USDA maintains an extensive database of reports considered by many to be the most authoritative in the world of cotton (http://www.ers.usda.gov/topics/crops/cotton-wool.aspx). In terms of market forecasts, Dr. O.A. Cleveland, Professor Emeritus, Mississippi State University, publishes a newsletter every Friday, which can be read on a variety of places on the web including Cotton Farming magazine (www.cottonfarming.com). For technical daily reporting on cotton price trends, there is the Rose Cotton Report (www.rosecottonreport.com). Also, seek out China’s National Cotton Information Service (www.cncotton.com) for the latest market information on the most important buying market in the cotton world. For India, South Asia and elsewhere, visit Fibre2Fashion (www.fibre2fashion.com). Finally, for weather forecasts, there are a number of sources, but the National Oceanic and Atmospheric Administration (www.noaa.gov) is a great place to start.

For now, it appears that prices may rise in the short run, but likely decline over the long run. The outlook for cotton prices will largely be determined by China. Here’s a quote from O.A. Cleveland’s most recent report:

“Speculation surrounding the agricultural public policy of the Chinese government ­- and specifically its cotton policy -­ continues to dominate discussion within the cotton market. Most likely, you have already tired of reading comments about:

– The desire of Chinese mills to buy imported cotton;

– The shortage of quality cotton in the world, specifically in the world¹s major exporting countries;

– The 50-to-60 million bales held by the Chinese government and hanging over the market;

– The market dumping of polyester by the Chinese government; and

– The Chinese movement to eliminate cotton production in its traditional eastern production region and move all cotton production to its northwest region.

These factors will remain in the forefront of the discussion regarding the world cotton market. They also support short term [bullish] market trends and long term bearish positions.”

— O.A. Cleveland, December 31, 2013

(http://cottonfarming.com/home/news/OA-Cleveland-Cotton-Report.html)

I agree with O.A.’s assessment. Even so, prices can change if the weather wreaks havoc or if some new government policy affects the normal trade of cotton. Here’s the point: Don’t leave next year’s sourcing decisions to chance. Check the numbers. Which brings me back to our friend Sisyphus. He’s still busy pushing that rock up a hill — but now I just noticed that it fell back to the bottom again. A lesson for textile and apparel companies? Yes. What goes up will eventually go down. It’s the same with cotton prices. They are up today, but they will be lower in the future.

By Robert P. Antoshak

Managing Director, Olah Inc.

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