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Sliding Supplies Lift Cotton Prices

Cotton prices have reached a record high and are likely to remain high over the coming months.

Eric Scholler

W ith global demand outpacing supply, the United States is currently in the midst of record early-season forward market sales. With the cotton market sensitive to global stocks, prices recently surpassed 1995 highs. As world cotton consumption is set to exceed production for the sixth straight year, world stocks are expected to drop 25 percent since the 2008-09 season, boosting prices and forcing traders and merchants to bid up prices for dwindling supplies.  Foreign stocks are also set to fall to their lowest levels since the mid-1990s. With stocks poised to slide, the question remains: Are prices likely to advance further beyond current levels? U.S. cotton spot prices continue to rise on strong foreign demand prospects in addition to sliding global supplies. Even Cotlook's A Index, a proxy for global prices, has soared, tagging an all-time high of more than $1.60 per pound. 

U.S. cotton shippers are expected to post strong export sales for the remaining months of 2010, likely driving prices higher. In addition to increasing export sales, a weakening dollar continues to boost foreign demand for U.S.-grown cotton as well as increase the urge for speculative buying of cotton among traders as prices become more volatile. The latest motion by the federal government to institute additional monetary easing is likely to drive prices higher still, not only for the cotton market but for the broader market as well, despite the Federal Reserve Bank's position that deflation remains a significant risk. Additionally, relatively poor weather this season, which is prompting a slide in cotton supply, is likely to further support prices in the remaining months of the year. 

The 2009-10 West Texas cotton crop was better than expected.
Fundamental economics says a drop in supply will usually raise prices. In Asia, this year's share of natural disasters and farmers calling it quits or abandoning cotton to grow more profitable crops has significantly eroded the supply of cotton on a global scale, which has given a nice lift to both domestic and international cotton prices. Especially in the United States, cotton prices have surged at a double-digit pace over the last three months as floods in Pakistan and China weigh on crop yields. In India, export quotas continue to further restrict the supply of cotton on international markets. According to the U.S. Department of Agriculture (USDA), global production is forecast to lag behind demand again this season, causing stockpiles to drain as China is poised to witness a production deficit of 18.5 million bales this year.   

India: Export Quotas Restrict Global Cotton Supplies
Officials in India — the world's second-largest producer of cotton after China — continue to halt cotton exports. More than once in 2010, India's Ministry of Textiles pulled the plug on cotton exports in order to bolster domestic supplies among textile mills. With exports halted yet again, India may continue to witness high cotton prices beyond mid-December, even after the arrival of new cotton, in spite of changes in international cotton prices. On October 11, the textile commissioner's office in New Delhi received export applications for 5.5 million 170-kilogram bales, capping exports for the year.  

Limited export of cotton resumed  November 1 and is expected to be completed by December 15. As of October 18, 3.8 million bales were registered for export. The industry expects carryover cotton from the last marketing year - October 2009 to September 2010 - to run out by December 15, boosting local cotton prices for new cotton in the marketplace. Recently, India's Textile Secretary Rita Menon ruled out the possibility of increasing the export quota in the coming weeks, which is likely to keep prices relatively unchanged. Currently, cotton leaving India is moving at a brisk pace. 

West Texas: Positive Prospects May Lift U.S. Cotton Prices
Despite scattered losses caused by rain and hail in West Texas, this year's crop is expected to turn out positively in most areas. These fields, some drip-irrigated, will produce more than 1.7 bales, or 792 pounds, per acre. Recent storms damaged crops north of Lubbock, causing little damage to the dryland farmers, who typically produce a yield of 1 to 1.5 bales per acre annually.

With potent demand throughout the cotton market, prices continue to climb higher. The current record for cotton prices was set on Oct. 26, 2010, at $1.3050 per pound. The previous record was $1.1720 per pound set on April 24, 1995. As far as records go, cotton traded as high as $1.89 per pound during the Civil War, when the North imposed a blockade, crippling the South's ability to ship cotton to Europe. 

 Strong export demand and a swift harvest continue to make it attractive to sell available supplies to mills rather than deliver on futures contracts, even at big nearby premiums over physically traded cotton. U.S. cotton export sales continue to advance, and rose to 600,900 running bales for delivery this season and next during the week ending October 14, from 572,900 bales the previous week. As of October 26, cumulative cotton export sales stood at 9.1 million 480-pound bales, of which 8.9 million consisted of Upland cotton.  


Price Outlook: High Prices Expected to Squeeze Margins
In addition to the slide in global cotton supplies, prices continue to be dominated by a sharp uptick in global demand as well as a jump in speculative traders. The USDA currently places the 2010-11 global stocks-to-use ratio at a tight 17-year low of 37 percent. This low ratio comes as marketing year-to-date average prices are the highest in more than 17 years. 

With the bulk of the U.S. cotton harvest already sold, prices continue to advance. Cotton fundamentals remain bullish, and in an attempt to spur growth in the U.S. economy, a rapidly sliding dollar continues to advance commodity prices in the broader market. Over the coming months, a weakening dollar is likely to contribute further to rising prices in addition to rapidly rising demand for cotton overseas. 

U.S. Federal Reserve Chairman Ben Bernanke continues to defend his latest economic stimulus package despite widespread criticism. Some Fed officials worry that the money being pumped into the economy will spur additional inflation or speculative price bubbles among bonds or commodities. In the coming year, expanding cotton prices, as a result of quantitative easing, are likely to prompt a financial or supply squeeze along the cotton supply chain. 

Over time, high cotton prices are likely to squeeze margins further among entities along the supply chain, ultimately forcing prices lower, according to Gary Raines, chief economist at FCStone Fibers & Textiles, Nashville, Tenn. However, over the coming months, prices are likely to remain well above the dollar mark, although increased volatility may move prices in either direction well into the 2010-11 marketing year.

Editor's Note: Eric Scholler is an economic analyst working in Charlotte.

November/December 2010