No Relief In Sight For Cotton Prices

Jim Phillips, Contributing Editor

M uch has been written in this space over the past few months about the escalating price of cotton and the inability of many spinners to pass raw material cost increases along to customers.

With only a few downward fluctuations, the price of cotton has been steadily on the increase for the past year. In late February, the spot market price for base cotton (color 41, leaf 4, staple 34, mike 35-36 and 43-49, strength 26.5-28.4, uniformity 81) was at $0.7103 per pound. Prices per pound for new cotton have not been this high since 2003, when, in October of that year, they reached $0.827.

And for spinners, it doesn’t appear there is any relief on the horizon. In fact, many observers expect the price to continue to increase steadily for at least the next 12 months in the face of reduced US cotton plantings.

“We had been expecting the price for cotton to go up for some time, and it didn’t.” said one spinner. “And then in the second quarter, it started going up, and the cost has risen steadily since. It looks like it is going to go on for awhile.”

And now it appears that prices could be headed to more than $1.00 per pound, at least according to several spinners who have kept ears attuned for news of price adjustments.

“I’m hearing cotton futures could get to $1.00 by early 2009, maybe even sooner,” said one spinner.

As is often the case when there are dramatic price increases, multiple factors come into play: weather; low crop yields in some parts of the world; and increased global demand, for example.

But for US yarn spinners, the biggest factor seems to be reduced acreage devoted to cotton growing.

Reduced Plantings The Culprit

“Even as cotton futures have been rising, so, too, have futures for other commodities, particularly wheat, soybeans and corn,” said one spinner. “It has become less profitable for US farmers to produce cotton compared to what they can get for other commodities.”

Statistics seem to bear him out. According to the National Cotton Council (NCC), cotton growers in the United States are projected to produce slightly under 15.5 million bales in 2008. If so, it would be the smallest crop since 1998, when production was slightly less than 14 million bales. Planted acreage is expected to fall almost 12 percent in 2008.

Global Demand Pressures

Further complicating the long-term outlook for US cotton prices is the anticipated increase in global demand for US cotton. NCC projects 14.7 million bales of U.S cotton to be exported and domestic demand to be about 4.4 million bales. Combined, these quantities outstrip the total projected cotton crop and could drive prices even higher.

China is again projected to be the largest export customer for US cotton, a forecast that rumples the feathers of more than one spinner. China, by most accounts, consumes about 40 to 45 percent of all raw cotton produced worldwide.

“When you’ve got one country that controls almost half of the cotton consumption in the world, it makes it hard to predict how prices are going to go,” said a spinner in North Carolina. “ If China increases its consumption and imports more cotton, it will hit all of us hard. If, for some reason, China’s consumption falls, we could see some easing in the pricing pressures. One thing I can tell you, though, is there appears to be no relief in sight for the pressure on my margins.”

Including China, worldwide demand is expected to continue to grow throughout 2008, but at a slower pace due to the “overall economic performance and strength in cotton prices relative to competing fibers,” said Dr. Gary Adams, vice president, economics and policy analysis, NCC. “ However, total use is expected to exceed production, which will further tighten stocks,”

So, at least for awhile, it appears spinners will continue to face the challenge of escalating raw material prices.

On the bright side, according to NCC, exceptionally good weather could push cotton production up by several million bales and ease some of the pricing pressures.

On the down side, bad weather could have just the opposite effect.

March/April 2008

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