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Cotton Prices Spike on Short Supply

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After all its cotton stockpiling, China is tight on supply of the commodity and mills are asking the government to release more from reserves.

Fewer quotas for low-tariff imports and increased demand for local yarn has squeezed supply, and greater dependence on China’s reserves could “dent a rally in global cotton futures that hit a two-year high this month,” according to Reuters.

What’s more, considerably lower crops from five of the largest producing countries and higher than expected demand has made for tighter stocks. And higher prices.

International cotton prices jumped to more than 80 cents per pound in the latter half of July, increasing from an average 70 cents per pound for the rest of the season, the International Cotton Advisory Committee (ICAC) said in a report out Monday.

On Tuesday, the spot price quotation for upland cotton was 72.16 cents, according to the U.S. Department of Agriculture. By comparison, cotton has been trading at roughly 60 cents per pound for the last several months. The uptick came in part from the USDA’s projection that world cotton consumption could be higher and supply lower.

World ending stocks for cotton fell 12 percent in the season to 19.7 million tons. Outside of China, stocks dipped 9 percent—the lowest level since 2010/11 to 8.4 million tons. In China, strong demand has led to a 12 percent decline in national stocks to 11.3 million tons.

“Demand for cotton from the Chinese government’s reserve has been string since auctions started in May 2016,” ICAC said.

For the first week of auctions, China saw a 99.9% purchase rate of its cotton. An average of 26,000 tons of cotton have been offered for sale each day and nearly all of it has been sold. Total sales through the end of July amounted to 1.6 million tons, bringing China’s national reserves to a balance 9.4 million tons.

China’s cotton production for the season fell 26 percent to 4.8 million tons, though mill use declined only 2 percent, and mills have reported demand this season better than the previous.

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Global cotton demand dipped 1 percent to 23.9 million tons in 2105/16 and world production dropped 18 percent to 21.3 million tons, contributing to the tight supply chain predicament at the close of the season.

Declines in production occurred in India, China, the United States, Pakistan and Brazil—which combined account for 76 percent of world output.

Output in India, the world’s largest cotton producer, declined 11 percent to 5.7 million tons. Production in the U.S. dropped 21 percent to 2.8 million tons. Pakistan produced its lowest level of output since the 1998/99 season, which led to a 34 percent drop in production. Output in Brazil fell 11 percent to 1.4 million tons.

“In 2016/17, world production is predicted to increase by 8 percent to 22.9 million tons. Gains in India, the United States, Pakistan and Brazil will offset the loss of production in China 2016/17,” ICAC said. “Better cotton prices during the growing season will encourage farmers to use more inputs, such as fertilizer, in order to improve yields and take advantage of higher prices.”

World production may be expected to increase, but consumption will likely remain stable. Mill use in China could decrease 3 percent to 7.1 million tons because of high cotton prices, low polyester prices and limited imports.