The global cotton market has been deeply affected by fundamental factors of supply and demand, and the Great Lockdown resulting from the COVID-19 pandemic, the International Cotton Advisory Committee (ICAC), said in a new report.
That impact, in turn, has put pressure on all sectors of the global textile and apparel value chain. Based on the ICAC’s estimate for the current 2019-20 season, global production has decreased 4 percent from initial estimates to 25.2 million ton, as worldwide planted area fell based on lower prices.
Global consumption for the season is estimated at 23 million tons due to containment measures “and the continual pressure of global trade tensions,” the report said. “With decreasing use, ending stock levels are expected to rise to 21.8 million tons, with the stocks-to-use ratio at record high levels.”
In the U.S., the latest U.S. Department of Agriculture (USDA) report featured large decreases to global mill-use estimates for the 2019-20 season of 2.3 million bales to 102.7 million and for the 2020-21 crop year of 2.1 million bales to 114.4 million.
This resulted in significant increases to ending stocks in both crop years. The current projection for 2020-21 ending stocks calls for the largest volume of global warehoused supply since the record was set in 2014-15, USDA said.
“Given on-going uncertainty regarding the full effects of the COVID-19 pandemic on the world economy, further downward revisions to mill-use and further upward revisions to ending stocks are possible,” Cotton Inc. said.
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The macroeconomic picture, according to ICAC, is directly correlated to cotton consumption–when gross domestic product (GDP) growth slows, consumption growth has followed suit. According to the current International Monetary Fund (IMF) projection, a 3 percent contraction in the global economy will likely contribute to an 11 percent decrease in cotton consumption, ICAC noted. However, as GDP growth accelerates, consumption growth should also recover.
“While the IMF’s current projection for a 3 percent decline in GDP is more severe than the 2008 financial crisis, this crisis differs in that it was induced by a public health event rather than weak policies in the financial sector, signaling the possibility of a smoother and swifter recovery under appropriate policy responses,” ICAC said. “The widespread lockdown has resulted in record levels of unemployment. While there has been an increase in online shopping in some countries, retail activity in the textile and apparel sector has slowed.”
Where fiber prices are headed
Cotton prices are expected to remain under pressure for several reasons, including higher ending stocks in the current and next season, weaker textile fiber demand from brands and retailers, and lower polyester prices. If the price gap between cotton and polyester continues to widen, it could reduce cotton’s competitiveness and decrease its share of global textile fiber consumption.
U.S. spot cotton prices averaged 56.19 cents per pound for the week ended June 11, according to the U.S. Department of Agriculture (USDA). That was up from 55.22 cents per pound last week, but down from 61.05 cents a year earlier, USDA said. The synthetic fiber producer price index (PPI), which predominantly includes polyester, was down 0.2 percent in May and was 3.2 percent below the index from a year earlier, according to the U.S. Bureau of Labor Statistics.
Cotton Incorporated’s monthly analysis said several benchmark prices drifted higher over the past month. The New York July futures contract increased slightly, to 60 cents a pound from 58 cents, while prices for December futures contracts rose at the same levels.
The A Index, an average of global prices, climbed to 68 cents a pound from 65 cents, while the China Cotton Index increased to 78 cents from 73 cents.
Wool prices have also been depressed from lower demand, especially during the crisis, although supply has also been down from a long-term drought and farmers opting to use their land for higher yield crops. For the week ended June 12, the Australian the Eastern Market Indicator was down 12 cents to $11.71 from a week earlier.
“Since late February, many textiles and apparel export orders have been cancelled or delayed and major retail companies have filed for bankruptcy,” ICAC said. “Short-term prospects for the textile and apparel industry are expected to be grim…the losses to the merchant sector caused by the contract cancellations linked to COVID-19 will likely cause more firms to exit the cotton trading industry.”
A slow recovery extending beyond a year to 18 months without greater efforts to promote consumer demand would lead to a more severe contraction in cotton mill-use in 2021, ICAC said.
“With the global 2020/2021 production estimated at 25.1 million tons, an additional economic slowdown and slow consumption growth would increase pressure on ending stocks, which in turn increase downward pressure on prices,” the report said. “In a prolonged crisis, food security would become an important issue and smallholder farms in developing economies would likely switch to food crops.”
There are potential arguments for why prices may have been able to gain ground despite projections for near-record global stocks by the end of 2020-21. According to Cotton Inc., one is that market participants may be less pessimistic than the USDA regarding the post-pandemic recovery. Another factor may be the increase in liquidity resulting from central banks around the world expanding the money supply, which would explain some of the recent correlation between cotton prices and equities.
However, recent projections for global economic growth have been revised lower. The World Bank recently released figures suggesting global GDP could contract by 5.2 percent in 2020. In April, the IMF predicted the decline would be 3 percent.
“Under these tough economic conditions, clothing has proven a product category where consumers have chosen to pull back,” Cotton Inc. said. “In the latest apparel spending data for the U.S. [April], there was a 48 percent decrease year-over-year. The evaporation of consumer demand has saddled retailers with inventory and there have been price decreases to help move product…Although there are some bright spots, such as on-line spending, the combination of lower sales volumes and lower margins does not put many retailers in the financial position to maintain order volumes.”
At the final end of the supply chain, retail apparel prices were down a seasonally adjusted 2.3 percent in May after declining 4.7 percent in April and 2 percent in March, according to the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index. The falloff in apparel prices was seen across the board, led by a 3 percent decline in women’s wear.