Spend Matters welcomes this guest post from Monika Sosnowska of Mintec.
Cotton prices started falling in May this year, and by October the price in the US has fallen by 34%, to a 5-year low. This downward trend has been caused by favorable crop conditions in the US and a predicted large drop in import demand from China. Will this mean cheaper textiles and apparel? Or will there be a reversal in the trend of increasing use of manmade fibers as opposed to natural ones in textile production?
China is the biggest cotton producer and also the world largest net importer. According to the United States Department of Agriculture, the cotton imports to China will reduce by 50% year-over-year in the 2014/15 season. Luckily, some countries are estimated to increase their imports, such as Bangladesh and Pakistan, which will partly offset the drop in Chinese demand, but even so, global imports are estimated to fall by 16% y-o-y this season.
So, what is the actual reason behind this sharp drop in demand? The Chinese government has recently changed its approach, and introduced an income support policy instead of a price support policy. The previous initiative led to a huge stock accumulation in the Chinese State Reserve over the last few years. As a result, China currently holds 58% of the world cotton ending stock in the 2014/15 season. However, cotton farmers are to receive direct subsidies from now on, instead of government buying their cotton and stocking it in the reserves, which should help the situation.
In the US, the 2014/15 production in October is estimated 26% above the 2013/14 production, and ending stocks are expected to double. Crop conditions for 70% of the US cotton crop are assessed as good or fair and 10% as excellent according to the USDA. With favorable US crop conditions and the lack of Chinese demand both depressing the global market, cotton prices have fallen sharply and the trend seems likely to continue in the near future.
So what are the likely consequences? Textiles and clothing to become cheaper in the near future, or higher cotton content in yarns?
Manmade fibres like polyester are cheaper than natural cotton, and this significant drop in world cotton prices has narrowed the gap between them. However, polyester prices have been trending downward for over a year as well, affected by global overcapacity, and despite a rebound in June, prices have started to drop again due to a lull in demand.
US trade statistics show that the country imported 3% less cotton apparel in the first half of this year compared to last year, while manmade apparel imports increased 7% over the same period of time. The question remains whether the recent price drops, with cotton prices becoming cheaper week after week and therefore more competitive with manmade fibers, will encourage textile producers to reverse this trend? Afterall, cotton is a natural fibre and global consumer trends in recent years have moved toward natural, healthier and organic products across many sectors.