• Based in Rabobank’s London office.
• Specializes in soft commodity market forecasting.
• Concentrates on coffee, sugar, cocoa and cotton.
• Undergraduate degree from Univ. of Calif-Davis.
• Masters degrees from Univ. of Hohenheim in Germany and Univ. of
Wageningen in the Netherlands.
• Previously worked for consultancy in Germany and also was with major
commodity trader in Rotterdam.
Price is always the main factor that impacts cotton demand, but this year it isn’t going to be the only thing driving the cotton market. Chinese government policy, an anticipated recession in the European Union, a depressed market in the United States and the weather are all vying for their share of market impact.
China is the largest producer of cotton, growing 33.5 million bales in 2011, but its demand for cotton – more than 40 million bales each year – exceeds its production capabilities, making it the largest importer of cotton, too. To protect that market and to continue to set global pricing, China has created an artificial demand by buying reserves. Earlier this year, the Chinese government purchased a large stockpile of cotton, taking it off the market. This cotton reserve of 20 million bales isn’t being distributed. It’s sitting in warehouses. The future of that cotton could play a crucial role in setting market prices globally.
For now, the stock ensures that Chinese production and pricing remain supported. This has driven short-term demand and ensures that the country has an adequate supply of cotton if there is a shortage in the market this year, but it isn’t a long-term measurement of the global market demand.
Also playing a big role in market prices for cotton are the macro-economic factors playing out in the EU and in the United States. The United States is still struggling out of an economic recession, and with the value of the euro diminishing, two of the steady markets for cotton have slipped into low demands. Consumers in both the EU and United States are purchasing less clothing or they’re purchasing clothing with more synthetic materials because synthetics remain cheaper than cotton. This creates two issues: The decline in cotton being used in apparel and the transition to more synthetic materials. If cotton prices don’t remain low, synthetics will continue to poach market share from cotton. The only way the trend toward increasing synthetics will decline is if the economies in these regions improve – as the cotton stocks in the apparel industry are very low, and the industry would have to restock and do it quickly.
Further impacting the markets will be the weather. Both Texas and Georgia, the two biggest cotton-growing states in the United States, are recovering from drought, and both have the potential to see the drought continue this summer. Northern China is already running into issues with its crop this year due to weather-related issues, but it’s likely it will have time to replant, so the jury is still out on how that might change global cotton acres.
The final major factor at play is India. As the second largest cotton-producing country, its ban on exports really hurt cotton prices within the country. Indian farmers saw a significant drop in returns, and no one is sure yet if that will reduce the number of cotton acres they will plant this year. Without a decent export market, internal demand can’t support the amount of production normally met in India.
Here’s what this means for producers: If they haven’t already locked in their prices for the 2012 crop or instituted a price-risk management plan, now’s the time to do it. If China replants, and India removes its export ban, we’re likely to see too many acres in 2012, which will drive prices even lower. Since the beginning of the year, cotton prices have dropped steadily from one dollar to 72 cents a pound and remain under a lot of pressure. If the United States has both a decent planting year and favorable weather, those prices could go even lower, possibly to the point of bottoming out around 70 cents per pound. Producers will want to be able to realize current values for new crop cotton in case the demand is less than the production.
The upside of the current situation is that the market looks to be heading into a similar cycle to what we saw in 2009 and 2010. In 2009, U.S. producers dropped cotton acres from the traditional 10 to 13 million planted acres down to fewer than 9 million acres. This made fewer exports available for 2010 and increased prices considerably. With the price of corn and soybeans looking to remain steady and high, it’s very likely we’ll see a reduction in the cotton acres next year due to economics. This would make 2014 very profitable for U.S. producers and will likely prompt the Chinese government to continue stockpiling to hedge against this trend.
Keith Flury is Senior Commodity Analyst at Rabobank and is based in London, England. Contact him via email at firstname.lastname@example.org.