Cotton prices: The top 10 most important drivers

This is the fifth in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 5 looks at cotton prices.

1) Economic growth

A shaky economy tends to dent consumer spending on discretionary items such as cotton sheets, shirts, and jeans. It may also lead to a substitution effect towards cheaper man made polyester clothing and away from cotton.

2) Government policies

Many cotton producing countries have sought to insulate their farmers and the textile industries upon which they depend from external competition (see driver no. 4), changes in these policies (eg, subsidies) can have a disproportionate impact on other global cotton producers. For example the US government has subsidised US cotton farmers since the 1930’s, to a greater extent that farmers of other crops. However, these subsidies distort global flows of cotton. read more

5 factors affecting cotton prices

Is cotton hanging by a thread? Will soft growth fray the cotton markets nerves? Will a soft market leave cotton with no cushion or is the cotton market unraveling?

Whatever, it is the only major commodity futures market to have registered a significant increase in price during 2015 – up 7% at 64 cents per lb.

Feld mit reifer Baumwolle.jpeg
Feld mit reifer Baumwolle“. Licensed under Public Domain via Wikimedia Commons.

1) Declining cotton production

The US Department of Agriculture, in its first forecasts for 2015-16 forecast world cotton output falling 5.4% to 133 million bales, sapped by lower, or flat, harvests in all major producing countries. US output will fall particularly far, by 2.1 million bales to 14.1 million bales, a reflection of lower sowings due mainly to relative prices and net returns that favour alternative crops. read more

Cotton prices hit 21-month low

Cotton futures prices fell below 70 cents per lb on Wednesday, the lowest level since November 2012. High cotton prices at the start of the planting season (they peaked at 94.75 cents per lb in May) and weak prices for other crops such as corn encouraged US farmers to increase the amount of land they devoted to the crop. According to the USDA cotton growers in the US planted 11.4 million acres, up 9.3% compared with 2013. An easing in drought conditions in key producing state Texas also helped – a year ago more than 12% of the state was experiencing exceptional drought, now that area is down to 5%. read more

Where next for cotton prices?

Cotton futures prices peaked in early May at around 95 cents per lb, the highest level for over two years. Since then cotton futures have declined by 10 cents per lb as heavy rainfall in west Texas around Lubbock (the area typically produces a fifth of the US cotton crop) led traders to anticipate a larger harvest. According to the USDA 36% of Texas’s cotton fields have been planted, the rainfall allowing farmers to plant more cotton seeds and helping those seeds already sown to survive. The rain is especially welcome after recent harvests have been buffeted by drought. Meanwhile increased demand from China, the top cotton consumer and the US, the largest apparel market means that supplies could hit a 23 year low later in the summer, according to projections from the USDA. read more

Chinese cotton auction unlikely to be game changer

The FT are reporting that China will start auctioning off some of its vast state cotton reserves tomorrow (Thursday 28th Nov). Cotton futures prices have declined by almost 20% since August on speculation that China would start to release some of its reserves.

Related article: Cotton prices blanketed by Chinese stockpile release fears

According to the minimum price for the auction will be set at $1.34 per pound – almost 70% higher than the current futures price. read more

Cotton prices blanketed by Chinese stockpile release fears

Fear that China is gearing up to release some of its 10 million tonne stockpile of cotton has sent cotton prices down 19% since mid-August to around 76 cents per lb.

Graph of Cotton futures (cents per lb)

Related article: Chinese stockbuilding of strategic ags unlikely to end soon

The Chinese government has shelled out $33 billion over the past two years buying domestically produced cotton, keeping the domestic cotton price at almost double the global price in a move designed to support Chinese cotton farmers.

Chinese cotton farmers responded to the higher price signals by boosting output meaning that last year the Chinese government had to buy 85% of domestically produced cotton to maintain its price support. read more