Record Demand Keeps Cotton Prices High

Jill Rowen, October 12, 2010

NEW YORK - Manufacturers have been struggling with rising cotton prices in last few years and the reason is simple. It is Economics 101: the record demand for cotton around the world is continuing to outpace production. In fact, Cotton Incorporated reported that this is the sixth consecutive year where production has been lower than consumption, with the latest fi gures indicating a 4 million bale production/consumption gap for 2010/2011.
     The silver lining is that organizations from Cotton Inc., to the International Cotton Advisory Committee (ICAC) and India's Texprocil all report that cotton production will be up this year. That may be of little comfort to vendors and buyers in the home textile arena. Even this increased production doesn't off- set the increasing worldwide demand for the popular fiber. And then there's the weather. The end result: don't expect lower prices any time soon.
     According to Jon Devine, manager, market economics and analysis, Cotton Inc., cotton prices are at their highest level in 15 years. While stock - warehoused cotton from previous seasons - is at 40 percent, its lowest level in that same time frame.
     The ICAC Price model forecasts a 2010/11 season average of 89 cents per pound, according to the Cotlook A Index. (The Index tracks international raw cotton prices to come up with an average.) The forecast translates to a 15 percent increase in price over 2009/10.
     "According to the estimates by industry sources, cotton prices are likely to increase in the first quarter of the season, October to December 2010," agreed Sidartha Rajagopal, executive director of Texprocil, India's non profit marketing organization. "After that, depending on the demand and supply, prices are likely to fluctuate."
     There is a cyclical element to cotton farming that is also at work. In the U.S., for instance, lower cotton prices of years ago convinced many farmers to choose more lucrative crops to plant. "The places you can grow cotton, you can also grow corn (for ethanol) and soy and that's what farmers have been doing," noted Devine. Supima, the U.S. organization for Pima cotton growers, reported that last year California had its lowest acreage of cotton since the 1920s, at 190,000 acres with Pima cotton accounting for 62 percent of that.
     Only now, with the promise of higher prices, have some farmers decided to grow cotton again in the U.S. In fact, production domestically is expected to increase by as much as 50 percent - due to more plantings as well as cooperative good weather which promises a higher yield. In addition, India is expected to show a significant increase in production and yield.
     But still, demand overshadows the production. According to Rajagopal, no one country accounts for the higher demand and increases are being seen across the board. "This demand is not region specific or country specific. The all around increase is expected on account of rising exports of textiles and clothing and also rising domestic consumption, especially in markets like China, India, Vietnam, Turkey and Bangladesh," he said.
     While the U.S. tries to close the production gap, adverse weather and natural disasters have wreaked havoc around the world, including Pakistan, where the cotton crop has been devastated by floods. According to Armelle Gruere, a statistician with the ICAC, "The Pakistan crop estimate was revised down by about 15 percent to 1.9 million tons. There is still a lot of uncertainty, however, and that number may change because in many areas the flood waters have not yet receded."
     According to Devine, Pakistan is not only a large producer of cotton, but also one of the world's largest suppliers of yarn. "There is a trickle down effect that could not only impact the price of raw cotton, but yarn levels as well and could ultimately result in price increases in finished products," said Devine.
     Crops in China's Yangtze River Valley region were also victims of bad weather. On the other hand production projections for India, Australia and Uzbekistan are up.
     This mixed bag of news doesn't help vendors in the current marketplace. Because a cotton crop has only one harvest per year, experts predict it will take years to achieve a better production and consumption balance.
     Cotton Inc's monthly update for August tells a cautionary tale: "Current production and consumption forecasts indicate a 4.0 million bale production/consumption gap in 2010/11. Higher prices, brought about by lower supply relative to demand, should eventually bring production levels back in line with consumption figures. However, with only one harvest per crop year, the corrective process could take several seasons to reverse and begin to increase stocks."
     "In the meantime, retailers at the end of the cotton supply chain face a challenging consumer environment," the report continues, especially "in developed economies where it may be difficult to pass on higher costs posed by higher cotton prices."

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