Spend Matters welcomes this guest post from Rajiv Joarder, of Mintec.
After being on a downward trend for more than a year, the price of cotton in the U.S. has increased by 13% since March, reaching a nine-month high. An array of factors is propping up the cotton price at the moment. Due to adverse weather conditions, Texas plantings for 2016/17 are behind schedule. The U.S. is the world’s biggest exporter of cotton, accounting for nearly 26% of all exports.
The surge in cotton prices also coincided with the seasonal lack of supply for U.S. cotton, with the market relying on stocks from the previous season as farmers are starting to plant the new crop.
Another contributing factor is the higher price of polyester. Polyester is a cheaper alternative for cotton and its main feedstock is crude oil. As the price of crude oil rises, invariably the price of polyester increases, too. This increases attractiveness of cotton.
If we broaden our view and look at the global market for cotton, we will also see that in the last two months prices in China, the top importer of cotton, rose 20% amidst increased demand from its spinning mills.
So with all of these factors it looks like prices are likely to continue to rise, at least in the short term. However, there is skepticism in the market about the longevity of this trend.
The main reason for this is that an underlying supply for the global market is still good.
Global production for 2016/17 is set to increase 6% year-over-year to reach 21 million tonnes and is expected to rise faster than consumption. Increases are expected for all major producers, apart from China. Stocks are forecast to decline as China continues to run down its reserves but are still pegged at a high level by historical standards.
Over the last two years, Chinese prices were under pressure due to lower demand. To support local farmers, the Chinese government introduced a stockpiling policy. It resulted in accumulation of large cotton stocks in state reserves, which are now gradually being sold back into the market.
Even if prices do remain firm, we should remember that we are still in a good place compared with the much higher levels seen in 2012–2014.