Cotton Prices Heading Up Cotton Prices

Don Hogsett, March 20, 2006

The world supply of cotton is forecast to drop as much as 5% this year, at the same time that demand is heating up, putting upward pressure on cotton prices, which are now forecast to climb by more than 13% this cotton year, to an average of $0.59 a pound from $0.52 a year ago.

The International Cotton Advisory Council (ICAC), a consortium of worldwide cotton growers, said crop shortfalls in Latin America and Australia will drive worldwide production down an estimated 5.3%, to 24.9 million tons from 26.3 million tons last year. At the same time, demand continues to rise, and consumption is expected to increase by 3.1%, to about 24.4 million tons from 23.7 million tons in 2005.

The laws of supply and demand being immutable and unforgiving, look for prices to skyrocket, the ICAC said in a monthly update of its annual production and pricing forecast.

A big part of the problem is Latin America, where production is forecast to fall about 13% from last season, to 2.3 million tons. That means the region's share of the world supply of cotton will decline to 9% from 10% a year ago, and from 11% the year before that.

Cotton production is forecast to fall about 24% in Brazil, and by 10% in Argentina, due to cutbacks in planting.

“Dry conditions in Argentina delayed and reduced cotton plantings. In Brazil, changes in the exchange rate increased production costs and made even less favorable the below-average world prices at planting time. At the same time, some Brazilian growers faced difficulties in obtaining loans from banks to finance production costs,” said the ICAC.

Making matters even worse, production is forecast to drop in Australia by roughly 12% because of an expected decrease in yield.

Production is up sharply in some African nations. As one example, the yield has risen by more than 50% in Zimbabwe. But this is not enough to pick up the slack.

For the following year (2006/07), prices are forecast to jump more than 10% to $0.65 a pound, as demand continues to outstrip production.

WORLD COTTON SUPPLY AND PRICING FORECAST
(in millions of tons, except for cotton prices)

2004/05 (ACTUAL) 2005/06 (PROJ.) 2006/07 (PROJ.)
Source: International Cotton Advisory Council (ICAC)
Production 26.29 24.9 25.5
Consumption 23.66 24.4 25.1
Cotlook A Price Index $0.52 $0.59 $0.65




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