Amid the stratospheric rise, and fall of the lumber market, a surge in the price of corn and other grains, multi-year high energy prices and sharply higher industrial metal prices one of the few corners of the commodity market yet to get much attention are ‘soft’ commodities. One market that is flying under the radar is the cotton market, and here it is experiencing a supply side shortfall due to concerns about a major producer, weather related disruptions and a post-lockdown demand surge.
Earlier this year the US banned entry of all products using cotton from Xinjiang, due to allegations that the ethnic Uygur Muslim community was being illtreated. The allegations include mass arbitrary detention and the use of forced labour. Xinjiang accounts for around 80% of China’s cotton production, and 20% of global cotton supply.
Outside of formal intervention by governments, major clothing brands have also been seeking to disassociate themselves from any suggestion that their clothing items may have been manufactured using cotton picked under duress in Xinjiang’s cotton fields. The challenge facing brands trying to track cotton through the supply chain is immense. For example, cotton picked in Xinjiang may be sent to countries such as Bangladesh, Vietnam and Cambodia for assembly into garments.
In the absence of clarity over the provenance of cotton used in their clothing lines the sensible strategy for a major brand might be to go to extremes to avoid any risk of being associated with the allegations. This could include moving garment facilities elsewhere in the world to where cotton is available and labour is cheap, such as Brazil or parts of Africa. For those garment producers based in Xinjiang, they may have to import cotton from outside of the country as their local feedstock will not be able to enter international markets.
Cotton production from Xinjiang was already under pressure due to cooler than normal temperatures. Other major cotton producing countries have also been affected by adverse weather. For example, drought has affected cotton growing regions of Brazil, India and the US, the world’s largest exporter of cotton. According to the US Dept. for Agriculture (USDA), cotton crop conditions in Texas (responsible for one-third of the US cotton crop), are among the lowest in the past 20 years.
Labour costs and adverse weather are two of the biggest factors affecting cotton production costs. However, another factor is also at play that threatens to push up costs. Cotton is also one of the most energy intensive commodities. It has the largest per-acre energy costs of all agricultural commodities and so so changes in the price of oil can also directly affect the price of cotton. In addition changes in crude oil prices affect the price of polyester, a substitute to cotton in the manufacture of textiles. With crude oil prices near $80 per barrel, coal prices at record levels and multi-year highs for natural gas, cotton production costs are being pushed higher.
Cotton demand is also set for a lift as consumers get back into buying clothes after an 18-month hiatus – either finding the contents of their existing wardrobe is either too loose, or more likely too tight! For example, textile exports from Bangladesh, the world’s second largest garment producer after China jumped 31% in the year to June 2020. Demand could get a further boost if foreign holidays become available later this summer, and as more people return to the office as lockdown restrictions ease.
There are longer term demand side trends in play that could see a seismic shift in cotton demand. First, consumers are increasingly aware of the pollution risks from polyester clothing. For example, washing polyester clothing leads to micro-plastics entering the ocean. Second, packaging manufacturers are increasingly incentivised (through taxes such as the UK’s Plastic Tax, EPR and voluntary agreements) to increase the recycled content of their plastic packaging. Competition for this material has sent rPET prices soaring, but this was material that would traditionally have been used by garment manufacturers. Together these factors are leading to a greater share of clothing being 100% clothing, or at least a higher share of cotton.
Cotton prices fell by 30% during the first quarter of 2020 to below 50 cents per lb by late March and into early April. Along with other commodities the price has been on a tear since then, up 85% and one-third up on pre-pandemic levels. However, that could just be the start of a much more sustained bull run.
The last time the cotton market was in the grip of a bull market was between July 2010 and March 2011. Over a 9-month period the price of cotton almost tripled to over 200 cents per lb. Back then the boom was prompted by a demand surge post Great Financial Crisis, bad weather in Pakistan, and restricted cotton shipments from India as the government sought to protect its domestic textile industry from high cotton prices.
Earlier this month cotton prices hit record levels in India in local currency terms. While this is a boon to the country’s farmers, its less good news for the garment industry, who like a decade ago must now pay very high prices for their cotton. Couple this with weather and ESG induced disruptions to supply, and a post-lockdown recovery in demand and it all starts to sounds very familiar.
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