Cotton prices are at record levels, near $1.70 per pound as supplies are at their lowest levels since 1993. We expect prices will continue to appreciate in the first half of 2011 as there is not enough cotton to go around and the deficit in supplies will continue to widen due to reduced production estimates.
The price of cotton is up over 100% in the last six months and up 150% over the past 18 months. Supply concerns have been prominent around the world as floods in Pakistan, heavy rains in China, and India capping exports have led global inventories to decline to roughly 44 million bales. Demand for cotton has outpaced supply the last five years.
Emerging Market Demand
Robust demand from emerging markets such as China and India is putting upward pressure on prices. China is the world’s largest consumer of cotton and in 2010 consumed 40% of global cotton production. Despite record prices, China doubled its cotton imports in 2010 to the highest level since 2006 due to strong demand at mills and textiles.
The Chinese government has exhausted its cotton reserves and is now left subject to the import market. Wet weather in China has led to production downgrades leaving mills scrambling to get hold of whatever cotton they can. Chinese cotton production in 2010 was down 5.5% from a year earlier to 6.4 million tons.
Elevated cotton prices have caused some rationing and mills are substituting to synthetic blends. Polyester substitutes remain cheaper than cotton although it is not always possible to move to synthetic blends, despite the cost savings.
Chinese farmers have also turned to stockpiling on expectations of higher prices in the future. The Wall Street Journal reported that 9% of the world’s cotton is stockpiled by the Chinese.
U.S. Cotton Production
Despite a 50% increase in cotton production in the U.S. in 2010, ending stocks are at a record low of 1.9 million bales. The U.S. is the world’s largest export of cotton and exports 80% of production. At the end of 2010, U.S. export commitments were at 90% of projected exports for the season. U.S. ending stocks to use ratio is at a record low of 10% due to strong export demand.
High cotton prices should encourage U.S. farmers to shift acreage toward cotton in 2011. Estimates for cotton planting acres are roughly 12.5 million acres, a 14% increase from the 10.97 million acres planted in 2010.
Argentina is already capitalizing on the high prices as plantings increased 36% to 600,000 hectares and Australia planted a record 500,000 hectares, up 150% from last year.
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 have propelled commodities forward.
Cotton supplies are at multi-decade lows and expectations are for the market to remain tight for the next few months. The increased cotton plantings in 2011 will loosen up supplies, but these will only be available to the market in the fourth quarter of 2011.
Currently there is not enough cotton to go around and prices should continue to appreciate in the first half of 2011. Any unexpected supply disruptions could send cotton prices skyrocketing.
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