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.