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New Volatile Era for Cotton Indicates Prices to Stay Inflated

For textile mills and manufacturers that rely on cotton as a key raw material, upcoming conditions may not be so favorable as the market appears to be entering a new period of uncertainty and inflated prices.

Cotton Incorporated’s state-of-the-market report for May paints a dramatic picture of what’s to come. The report said the current 2018-19 crop year could prove to be a time of “transition into a new multi-year period defined by a new set of defining market fundamental conditions” that “suggests eventual upward pressure on cotton prices.”

This could send shivers through the supply chain. Vertical brands like Gildan Activewear and HanesBrands said in their latest earnings reports that increases in cotton prices have hit their bottom lines.

One fundamental shift could come from production. After a couple years of strong growth, global production is expected to be flat to lower in 2018-19. This is primarily caused by challenges facing the world’s largest cotton-producing countries, such as repeated pest attacks in India, rising production costs in China, and recurring weather-related issues in the U.S. and Australia.

“Given these challenges, the curve in the upward trajectory in production [originally] expected in 2018-19 could signal the onset of a sideways trend in world cotton production,” Cotton Inc.’s Monthly Economic Letter said.

Another major shift in market fundamentals is expected to come from an increase in Chinese imports. The report noted that many forecasts are calling for slight growth this crop year, but China’s persistent production-consumption deficit of 12 million to 15 million bales, along with the continued drawdown of China’s reserve stocks, indicates that China will need to increase its imports more dramatically in the near future. That will likely result in pulling stocks held outside of China lower.

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“Those increases will serve as a buffer against rising Chinese import demand, but with on-going production-related questions facing several exporters (India, U.S. and Australia), an eventual reduction in world-less-China stocks could be expected,” the report noted.

The monthly letter examined world supply and demand figures in recent decades to demonstrate how it’s possible to define multi-year periods by their dominant fundamental factors. For example, it noted that the period leading up to the price spike that ran from 2006 to 2010 and was epitomized by prices reaching historic highs of more than $2 a pound. That period can be characterized by falling global acreage and production, paired with the effects the global financial crisis of the time had on mill-use.

During a smaller spike cycle from 2011 to 2015, the global cotton market at the time was marked by Chinese policies, with strong Chinese import demand supporting world cotton prices, acreage and production, while also inhibiting global consumption growth. The current multi-year period that began in 2015, on the other hand, can be defined by low Chinese imports, rising global acreage and production supported by lower prices for competing crops like corn and soybeans, as well as accelerating growth in global mill-use, according to the report.

“The extent to which any of this happens will depend on the details concerning the timing and volume of changes in Chinese imports, how global production responds and what the weather may bring,” Cotton Inc. added.

It could also be negatively impacted by potential retaliatory import tariffs threatened by China on U.S. cotton, which could either be alleviated or exacerbated when Chinese and U.S. diplomats hold a second round of talks on the matter this week.

Meanwhile, Cotton Inc. noted in its report released Monday that New York futures moved higher in early May, but retreated in the latest trading. July futures, reflective of 2017-18 supplies, briefly broke above 85 cents a pound, but have since returned to levels near 84 cents.

The A Index, an average of global prices, also moved higher this month to 94 cents a pound from 92 cents a earlier. Chinese cotton prices were stable at about $1.11 a pound in the same period.

Indian spot prices were relatively unchanged at 80 cents a pound over the past month, while Pakistani spot prices were also steady at around 80 cents a pound, too. U.S. cotton prices averaged 81.53 cents per pound for the week ended May 10, up from 80.22 last week and 74.33 cents reported the year-ago period.