Cotton Prices Confusing

here is confusion throughout the cotton supply chain about where cotton prices are
headed. Recent fundamentals, including Chinese demand for cotton, US retail demand, and rising oil
and man-made fiber prices, appear to point toward higher cotton prices. However, cotton prices have
stayed low.

On the surface, this seems to be a good thing for the mills. Unfortunately, in most cases,
mill buyers haven’t really been able to take advantage of the trend because indicators have caused
them to lock into prices too early and watch prices continue to fall.

“The cotton market has punished the people who have followed it with discipline this year,”
said one cotton buyer. “The people who use cotton no longer control the futures market. The theory
was that over time, the fundamentals would apply. Now, nobody knows when they will start to apply.”

Cotton’s recent price behavior has defied modeling, reducing confidence in future price

“In any given year, cotton prices will be driven by the perceived supply/demand situation,
taking into account cotton as well as competing fibers, especially polyester staple,” said a cotton
industry observer. “The influence of the latter has been underestimated in recent years, while the
world was busy pointing to the US cotton program as a price depressant.”

Future Of Cotton Subsidies Uncertain

Perhaps the biggest story recently is the World Trade Organization’s (WTO’s) apparent ruling
that US cotton subsidies create unfair competition for Brazil, which had filed a complaint. The
report hasn’t officially been released — someone leaked the ruling.

“If press accounts of the WTO panel’s ruling are true, the case will be appealed,” said a
cotton analyst. “If any parts of the initial ruling are upheld, there would be an undetermined
period of time for the US program to be brought into compliance.”

Every Yarn Market respondent agreed the ruling should have little effect in the near future,
but may have long-term consequences. How big the potential consequences might be depends on whom
you ask. Right now, cotton producers and merchants appear more anxious than the mills.

“It’s a real issue,” said a cotton merchant. “It could have a huge effect on the US cotton
program. It sounds like it essentially attacks all aspects of cotton marketing.”

Higher Quality Cotton In Demand

While cotton producers and the mills haven’t always agreed about improvements in fiber quality,
everyone in the cotton chain appears to be excited about new cotton varieties and their quality

“While quality improvements have not materialized at the pace textile manufacturers would
have preferred, improvements are being made,” said one cotton expert. “Importantly, there are a
number of short-season and full-season varieties that promise further improvements in length,
strength and micronaire.”

He noted that for the five-year period ending with the 1992 crop year, 70 percent of the US
crop averaged strict low middling (SLM) or better; for the five-year period ending with the 2002
crop year, 80 percent of the crop averaged SLM or better; and average fiber strength increased from
26.9 to 28.2 grams-force per tex. Uniformity data (available since 1995) have improved slightly,
from 80.9 to 81.1 percent. Staple length has remained relatively unchanged, and average micronaire
has increased from 41.0 to 44.9.

One mill manager offered a different view. “This past year was the first in the last five or
six that we feel the quality improved. We are all hoping this year will show us it wasn’t just
really good weather in ‘03-’04, but better seed varieties that are giving us better micronaire,
length and strength.”

That leads to another point: international competition demands better cotton quality, and new
varieties are key.

“I have to buy better cotton for our yarn mills than I used to in order to compete,” said one
mill executive. “Ring spinning has been much healthier than open-end. To spin the counts that go
into the market, we have to insist on 1 1/8-inch cotton and at least 28 grams per tex. We have to
increase our specs to keep up with international competition.”

June 2004