Cotton prices are above $1 per pound, the first time since 1995. Prices have risen more than 40% since July due to strong demand, tight supplies, and strong buying from speculators. Prices may continue to stay above a $1 per pound though 2011 as global demand exceeds supplies, creating an imbalance that will not be solved anytime soon.
Supply concerns have been prominent around the world as floods in Pakistan, heavy rains in China, and India capping cotton exports have led global inventories in 2010 to decline to roughly 45 million bales, the lowest since 1996.
China, the world’s largest producer and consumer of cotton, has been plagued with heavy rains, putting concerns on local supplies. Cotton production fell by 14.7% to 6.4 million tons in 2009 and is expected to be roughly flat in 2010. The USDA estimates that in 2010, China’s ending stocks of cotton will be 16 million bales, the lowest in over a decade.
Strong demand from textiles and end users has led to a 3.6 million ton deficit in 2009 and a 2.6 million ton deficit the year prior. In order to meet the deficit, China has been increasing imports as well as auctioning government reserves.
China has auctioned over 1.3 million tons of reserves this year and is expected to auction a further 300,000 to 400,000 tons to satisfy demand. China’s cotton imports have also rose 73% from last year to roughly 2.5 million tons.
India, which is facing wet weather in the north and dryness in its top two producing states, had capped exports of cotton in order to protect domestic supplies. India is the world’s second largest exporter of cotton and has announced it will limit shipments of cotton to 5.5 million bales in 2010 starting in October.
Pakistan, the worlds’ fourth biggest cotton producer, has faced severe floods that have wiped out 20% of their cotton crop. Cotton production in 2010 is expected to be 15% below the prior year, which has increased imports by over 60% according to the USDA.
Despite all the weather concerns around the world, the U.S. is actually expecting a bumper crop in 2010. Production is expected to increase 55% in 2010 due to excellent growing conditions and increased acreage. The U.S., which is the world’s largest exporter of cotton and exports 80% of production, has been able to pick up the decrease in supply around the world.
Exports are expected to rise 30% in 2010, according to the USDA. The increase in exports is taking a toll on supplies however, as the increased foreign demand will push the 2010 ending stocks to use ratio to 14%, the lowest in 14 years.
Fund flows from non-commercial participants have put pressure on cotton prices as well, as net long positions in cotton have rose five-fold since July. Open interest in futures contracts have increased over 50% in the same time period. The large amount of speculative interest in cotton leaves us somewhat concerned that there may be a quick pull-back if supplies start to loosen.
Tightening supplies, not only in cotton, have sent commodity prices rocketing over the last few months. A weaker dollar, improving economic outlook, and demand for real assets has propelled commodities forward.
Cotton supplies are at a multi-decade low and expectations are for the global market to remain tight. In the short-term it is hard to justify putting more capital in cotton at prices around $1 per pound and with speculative interest so high. On any pullback though, we would look to putting money back into cotton.
Consumption has outpaced production in the last five years and we expect that trend to continue. Enjoy your cheap clothing now, because it is not going to last.
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Disclosure: No positions