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Cotton and Fiber Outlook 2019: Prices Holding Steady But Volatility Persists

When it comes to cotton price forecasts, two key factors matter most: China policy and the weather.

While China’s controlled economy has made its decisions on supply and demand less reliable on market conditions in recent years than in a free enterprise model involving a globally traded commodity, the trade war that developed with the U.S. this year has exacerbated the situation.

The Trade Factor

Cotton Incorporated’s December monthly analysis of market conditions said, “Central questions for prices in 2019-20 center on trade, specifically will China begin to increase its imports in a big way and what will the outcome be to the U.S.-China trade dispute.”

So far, the accumulation of supply outside of China has not had a significant downward effect on prices, Cotton Inc. said, probably because the market anticipated an increase in Chinese imports. However, if Chinese imports do not rise as expected, a further buildup of stocks among exporters could push prices lower. On the other hand, if Chinese imports do rise to a volume needed to stabilize its stocks and meet China’s domestic production deficit of 14.5 million bales for 2017-18, “prices could be expected to move in the other direction,” the report said.

Another burgeoning factor for the upcoming crop year is the threat of slowing economic growth that could lead to lower growth in mill use. The International Monetary Fund’s recent downward revisions to world gross domestic product (GDP) estimated that the growth forecast for 2018 and 2019 are to stay flat with 2017’s 3.7 percent global GDP growth.

“While the latest projections are less optimistic, growth rates of 3.7 percent still represent the strongest rates of expansion since 2011,” when the Great Recession was said to have ended, Cotton Inc. said.

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The expected combination of higher production and slower growth in mill use next crop year could narrow the production gap of 6.9 million bales that exists in 2018-19, which has implications for global stocks and some relevance for prices, the report noted. Since the price spike in June that sent cotton prices above $1 per pound, however, “the allocation rather than the volume of world stocks has carried more significance for prices,” the report said.

Weather Matters

Then there’s the weather. There was also a bump in prices in early fall when Hurricanes Michael and Florence whipped through the Southeast Cotton Belt, damaging crops and property.

Cotton Inc. said, “At least one major weather-related challenge from the current season has abated. The drought in the important West Texan region of the U.S. has been eliminated by precipitation in recent months. A return to adequate moisture conditions in West Texas alone could add a couple million bales to the global harvest next year.”

Movement in global cotton prices has been mixed of late. Values for New York futures moved slightly higher to stand at about 80 cents per pound, values for Chinese prices moved slightly lower to $1.01 per pound and the Cotlook A Index, an average of global prices, has been stable at around 87 cents per pound.

According to the U.S. Department of Agriculture (USDA), spot prices averaged 73.12 cents per pound for the week ended Dec. 20. The weekly average was down from 75.37 cents a week earlier, but up from 71.04 cents from a year earlier.

Polyester and Other Fibers

The fiber market mantra long has been, “As cotton goes, so goes the rest of the market.” At the beginning of the global economic crisis in 2008, supply and demand, financial conditions and weather woes combined to bring cotton prices above $2 a pound for the first time in decades, and polyester and other manmade fibers followed suit.

Kevin Hall, chairman and CEO of Unifi Inc., on a recent conference call with analysts, said, “Raw material costs have been rising over the last four quarters and there was a dramatic jump in polyester costs in September that will place even more pressure on our second-quarter profitability. While this rise is clearly a headwind, we anticipate a better relationship between pricing and cost in the second half of the year:”

Hall said the company, which produces recycled polyester under the Repreve brand and a range of other polyester and nylon fibers and yarns, said the company “will continue to address input cost pressures with responsive pricing actions.”

The U.S. Bureau of Labor Statistics’ synthetic fiber Producer Price Index (PPI) increased 0.2 percent in November from the prior month to an index of 132.1. The synthetic fiber PPI rose 7.6 percent from November 2017. The index has a base of 100 from its origin in 1982.

The Lenzing Group, in reporting financial results for the first nine months of the 2018, said a decline in revenue and earnings compared with the same period of the previous year was the result of lower prices for standard viscose, more unfavorable exchange rates and price increases for key raw materials.

For 2019, Lenzing expects standard viscose markets to remain under pressure because of an ongoing oversupply and very high raw material prices. Lenzing’s specialty fiber business, which includes Tencel, is expected to continue the very positive development seen throughout 2018.

The USDA reported that the Australian Eastern Market Indicator was down 11 cents to $18.49 cents per kilogram. Australian Wool Innovation said merino wool “was highly sought, whereas the crossbred sector fell away significantly as the extraordinary gains of last week were outdone by the remarkably large losses of this week.”