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Historical highs for cotton prices
After nearly a decade of record or near record production in the US and on a global scale, sizable supplies developed. For instance, from 2004/05 to 2007/08 crop year, world ending stocks ranged from 60.7 to 62.1 mln bales which were multi-decade highs. In that same time frame, US stocks were also on the high side ranging from 5.5 to 10 million bales of the previous 15 years.
Due to plentiful supplies, mills began adopting retailers’ approach to inventory with their “just in time” delivery system. Meaning, do not buy it until you need it or something to that effect resulting in low stocks of raw cotton at the mill especially in making the transition from one crop year to the next.
In 2008 and 2009, high grain/oilseed prices pulled acres out of cotton in nearly every major producing country and poor weather in 2009 in the US and India resulted in the 6th lowest world crop since 2003.
Also occurring in 2009 was a rebound in cotton usage since consumers began to shop again after staying home as the longest recession since the 1920’s began to fade. An empty pipeline and a resurgence in cotton demand by mills resulted in pulling world stocks down by 28% to 43.7 mln, a decline of nearly 17 mln bales.
The impact of a smaller crop in 2009 (6th smallest since 2003) and significant improvement in demand (3rd largest on record) started a rally with cotton prices from a multi-year low of in the fall of 2008 to this past spring rising to upper end of a 15-year range.
Of course, we did not know all of this until recently as strong demand became apparent only after very strong prices reflected chronically short inventories in countries such as Pakistan and then India exacerbating an already precarious situation.
As for the new crop year, cotton producers responded to higher prices of the past 12 months by planting more cotton and by mid-summer, US and foreign cotton production looked healthy with only a few trouble spots but by August, all of that changed.
Pakistan saw monsoonal weather develop on a scale that was historical in nature severely damaging crops including cotton. Ultimately, their cotton crop would drop by 13% setting off a daisy chain of events. Why, Pakistan is one of the earliest countries to harvest cotton in the northern hemisphere allowing them to export some of their crop initially and then import as needed later in the season so mills outside of Pakistan had come to depend on their exports. However, Pakistani mills had to wait on the flood waters to recede before producers could begin picking and they had turned to their closest neighbor India for cotton.
However, the same monsoons swept across India delaying their harvest by several weeks even as it boosted their crop prospects. But concerns of potential damage and high prices resulted in India’s government restricting and then delaying cotton exports. After being the second largest exporter in 2009, foreign mills were counting on buying Indian cotton only to find their efforts stymied.
As if another challenge was the last thing the cotton market needed, whispers of crop problems began to surface in China in late September as they too had suffered from adverse weather since planting. In the past three months, the USDA has lowered China’s crop by almost 10% or 3 mln bales. Since China is the largest consumer of cotton, they can ill afford a smaller crop as larger imports are required to offset the loss. But imports were already projected by the USDA at their second largest level of 13 mln bales.
China, India and Pakistan are the three largest consumers of raw cotton and account for 65% of the world demand for cotton and all three experienced issues with their production this year.
In the past two months world production has fallen by less than 2 mln bales as larger crops in the US, India, Former Soviet Union group of countries and ultimately due to the push to new all time highs, Australia and Brazil would help offset losses in Pakistan and China but once the daisy chain of available cotton was interrupted, a panic like none seen in the cotton market began to unfold.
Mills were trying to cover immediate needs and paying nearly any price to get it. As the northern Hemisphere harvest moved forward, some lessening of demand was expected but the potential for even less cotton to be available in the second half of the crop year set off a fury of buying as nearly every one tried to secure sufficient cotton well into 2011.
Low mill inventory, a lack of cotton at a critical juncture due to damaging weather this fall, smaller stocks in exporting countries and a smaller world crop set off a bidding war for any/all available cotton. The US which is the largest exporter of cotton saw its export sales surge in the past few months and is at their highest level on a historical level. US total demand, domestic mill use and exports account for 84% of the crop meaning only 16% is available with 38 weeks or ¾’s of the crop year left.
On a global scale, these historical high cotton prices have finally begun to have an impact on consumption. The USDA reduced China’s cotton usage by a whopping 3 mln bales to 47 mln bales vs their 2009 figure of 50 mln bales in their Nov 9 report. Only small changes were made elsewhere and due to a plentiful supply, Indian consumption was bumped up 500K bales. World consumption is projected at 116.82 mln bales vs the 2009 level of 118.48, a drop of 1.66 mln bales. Even with a price decline as seen in the past 3 weeks, additional cut backs by foreign mills is likely due to limited cotton supplies and its associated high price versus that of other natural or synthetic fibers. Polyester first instance is about 35-45% below cotton prices here in the US, China, Pakistan, Taiwan, etc.
COTTON PRICE IMPACT
US futures have more than doubled in the span of 4 months rising to a high of 157.23 cts per lb, 34% above the previous all-time high of 117.20 from 1995. Two years ago, futures dipped to 236.70 due to the recession and measured from that low, cotton has rally by more than 425%.
Global prices have reacted in a similar fashion and in fact have been a guiding force with US values. The Cotlook A index which is an average of the 5 cheapest exportable quotes in the world hit a high of 172.40 this week vs its previous record of 120.00 from 1995.
Chinese values had been trailing the US and other countries until late Sept/early Oct when concern began to mount regarding their crop. In the span of 6 weeks, their prices rallied just short of a dollar rising from 1.20 to 2.11.
There have been days in the past 4 months when foreign prices affected those here in the US and vice-versa due to short-term shortages and those perceived over time. We are seeing the effects of a commodity that is truly global in scope with price impact from one or more countries being felt around the world.
FALLOUT FROM HIGH PRICES/COTTON SHORTAGES TO CONSUMERS
What this means for consumers is three-fold:
Cotton prices at all time highs will to some degree by passed on to consumers although every entity involved in the supply chain will have to take a bit of this bitter pill from yarn spinners to cloth manufacturers to the “cut and sew” operations to the retailer. Several retailers have already announced price increases and/or reduced earnings as they absorb some of the higher price.
Bear in mind its takes 3-6 months for a significant move in cotton prices to work its way through the manufacturing process and textiles such as apparel and home fashions arriving at stores now have yet to feel the full brunt of the price rally from the past several weeks.
All cotton items such as t-shirts, jeans, underwear will see an increase in price over time whereas
blended fiber products will not be up as much, if any. In addition, clothing such as shirts, pants, outerwear that is more labor intensive and contains a higher cotton content are subject to higher if not much higher prices, I.e. blue jeans.
Retailers may test the waters with higher prices but based on back-to-school sales which required discounting, that technique may not work. Whether heavy discounting occurs with apparel that contains a large percent of cotton is unknown.
Retailers are modifying their product line to reduce cotton content in products such as smaller pockets in jeans or sweat shirts without hoods.
Synthetic fibers such as polyester, rayon and nylon have also gone up in value due to terrific demand in a short span as mills are forced to run cotton with man-made to complete their orders. Retailers have been accepting of blended fiber products as they understand what is occurring with cotton prices and supplies and need the merchandise.
In general apparel prices into the US are higher in the third quarter of the calendar year vs the first half of lower prices due to higher raw material and labor costs in Asia per Emerging Textiles, a consulting company covering textile trade.
Consumer can expect higher apparel prices in the upcoming holiday season but especially in the first quarter of 2011. The extent of the increase will depend on cotton content and labor involved with apparel whether it is socks, shirts, sweat pants, dresses.
Less all cotton products and more blended fiber products will show on store shelves over the next 12 months or longer. Man-made fiber manufacturing has significantly improved in the past several years. My generation when thinking of polyester is reminded of the disco age but the next generation may feel differently and therefore more accepting of non-cotton fibers.
Finally, the look of iconic apparel is likely to change as apparel manufacturers’ hunt for ways to reduce cotton content.
LONG TERM IMPLICATIONS
As to how long these changes remain in place, it takes 6-8 months to grow a cotton crop and the southern hemisphere is responding with increased plantings. However, the bulk of cotton is grown in the northern hemisphere and planting will not begin until next spring so it will be next fall before the next crop is available. If Mother Nature is cooperative, I.e. no El Nino or La Nina weather phenomena, production will exceed consumption but with world stocks as low as they are, I think it will take two years before stocks are back up to a comfortable level and cotton prices move back to the traditional or long term average prices.
From my perspective, the cotton industry spent two decades winning over consumers to cotton’s advantages but our work is cut out for us over the next few years to undo the damage of this year’s high prices and re-build cotton’s market share of all fiber consumption.
The pendulum of cotton stocks and prices is swinging more often but more importantly much wider, two years from now, cotton supply should be plentiful and hopefully back in the minds of hearts of consumers.
The macro economic picture has also contributed to cotton’s rally more as a positive back drop with investors, traders, specs, commercials all buying commodities and stocks due to the weakening US$.
That may be changing given this past week price action. Stocks have broken a string of positive weekly closings and US commodities are near unchanged on the month after being up 7% in the first two week of Nov. The US$ settled at its best weekly close since the mid/late September and is poised to close at a 2-month high all of which has played a role in confirming a top in cotton and additional retracement over time. Note: As of last week, cotton has lost 50% of its run-up that began Jul 20 and stopped Nov 10.