Spend Matters welcomes a guest post from Nick Smith of Mintec.
New predictions of decreased US cotton planting for the upcoming 2013/2014 season has resulted in rising prices in the US. Stable cotton prices in China, however, have led to a slight reduction in Chinese cotton’s premium over US cotton.
Cotton has been cultivated for thousands of years and is grown all around the world. It accounts for around 40% of the fiber market in the US, and cotton cultivation takes up 2.5% of the world’s total available arable land. In 2011, as production and stock levels fell, demand outstripped availability, leading to a price peak. With the US market back at a relatively normal level, prices have fallen, but Chinese prices remain at a relatively high level.
The final global cotton production harvests for 2012/13 are currently forecasted at 25.9 million tons, a decline of 4% year-on-year, with production expected to have declined in India, Pakistan, Brazil and Australia. However, output in China, the world’s largest producer, is forecasted to have increased. Chinese production for 2012/13 will reach 7.4 million tons, up 3% year-on-year, while US production for this season is forecasted at 3.7 million tons, up 9% year-on-year.
US planting begins around March or April, and we expect to see a significant drop as farmers are put off by low cotton prices and are instead attracted by the higher prices seen for other drought-affected crops like corn and soy. Harvested area in 2013/14 is expected to fall to 7.6 million acres, a 19% decline year-on-year. Cotton prices in the US have jumped 7% since the start of the year in anticipation of this drop in supply.
Chinese cotton has historically had a premium over US cotton prices, and this premium increased by 40% over 2012. However, the gap has recently begun to contract as US cotton prices began to climb. This has come at a time when Chinese prices have somewhat stabilized due to low demand and increased supplies released from government stocks.
With planting in the US yet to take place, the recent price rise may lead to higher planting levels than currently expected. However, these forecasts are unlikely to change significantly, and therefore it is reasonable to expect reduced US cotton production for 2013/14.