Cotton Scrutiny Continues
July 19, 2012,
According to a May 23 story in the Financial Times (FT), the Commodities Futures and Trading Commission, via its enforcement division, launched a probe into trading activity during last year's spike in cotton prices. The article reports that certain market participants have complained that Allenberg Cotton, a subsidiary of Louis Dreyfus Commodities, forced sellers into the exchange even though alternatives may have been available. FT also reports that less than one in four CFTC enforcement investigations resulted in legal action last year.
In the same FT edition, a story appeared regarding a decline in cotton consumption, which has dropped approximately 8% over the last decade, according to the International Cotton Advisory Committee. The FT story cites contributing factors such as: changing preferences, the evolution of polyester in the apparel space (specifically in athletic wear), more competitive pricing of synthetics as well as polyester's ability to be sourced locally in production powerhouses such as China.
Nevertheless, on the pricing front, the United States Department of Agriculture reports in its monthly World Agricultural Supply and Demand Estimate released on May 10 that, "World consumption is expected to rise 3.3% due to modest growth in both world GDP and cotton's share of world fiber demand, as lower cotton prices relative to polyester improve cotton's competitive position."
A comparison of the market baskets of major retailers that HTT reported in February 2012 with the baskets reported five years ago, showed no significant shifts in fiber construction in nearly all categories at most of the stores. However, certain bedding items such as queen sheet sets, queen bed-in-a-bag and dust ruffles that were cotton/polyester blends in 2007 are now all polyester at Kmart, Target, and Walmart.
While cotton prices are expected to remain flat, macro-economic factors may come into play in the near term. There is some speculation in financial markets that due to the disappointing May jobs report the Federal Reserve will engage in a third round of quantitative easing, also known as QE3, or even more commonly as "printing money." Such Fed action tends to drive up the price of commodities generally, including cotton, as investors seek shelter in more tangible assets.
The previous round of quantitative easing was cited as one of many contributing factors to the 2010-2011 cotton price spike by John Robinson, professor and extension economist-cotton marketing at Texas A&M's Department of Agricultural Economics in an interview with HTT last fall.