Yarn Market: Cotton Prices, Consumer Confidence Create Concern

By Jim Phillips, Yarn Market Editor
“The only thing that is constant is change.”
— Heraclitus
6th century BCE

Just when it seemed the yarn industry was in the midst of a sustained period of stability, something changed. In this instance, the change entails a dramatic decrease over the past several months in the price of cotton, which dropped from around 80 cents per pound at the first of June to less than 65 cents per pound on August 20.

To put this in perspective, during the same period last year, the price hovered at about 87 cents per pound.

Coupled with recent reports of declining consumer confidence, industry executives are hedging somewhat on earlier predictions of robust business conditions through the end of the year. “Our business, in general, remains very strong,” said one multinational spinner. “But it’s not a warm and fuzzy feeling because we just don’t know what’s next. Our customers don’t seem to be giving us a lot of confidence about what’s coming up. We’re staying busy, but it is more on a day-to-day, order-to-order basis than it has been in recent times.”

“We have plenty of orders in-house, but they are, for the most part, very short,” added a specialty spinner. “We have the next few weeks booked out but don’t really have a handle on what’s coming in afterwards.”

Consumer confidence in the economy is bouncing around, with surges some months and precipitous drops in others. The Bloomberg Consumer Comfort Index fell to 36.3 in the period ended July 27, the lowest since June 8. Bloomberg reports that a gauge of households’ financial wellbeing dropped by the most since mid-May after reaching an 11-week high. Consumers were also less enthusiastic about the buying climate, a reflection of stagnant paychecks.

And, generally, when consumers become concerned about take-home pay, the first thing to go is discretionary spending on such items as clothing. “We are not ready to push the panic button at all,” said one industry insider. “But we are in a situation that makes caution a prudent approach. With the economic concerns and the issue with cotton prices, now is not the time for us to be aggressive in buying.”

Record Cotton Crop Pushes Prices Down
The U.S. cotton crop is estimated to peak at 17.5 million bales. Even though domestic mill use has remained constant and exports are projected to be up by 500,000 bales, ending stocks are projected to be around 5.6 million bales, or 39 percent of total use. This is the largest stocks-to-use ratio since 2007-08. And while, on the surface, a drop in cotton prices would seem to be favorable for cotton spinners, concern exists about how customers will view the current situation. “Cotton has been artificially overpriced for some time,” said one spinner. “It is not worth 90 cents per pound or more, but China’s cotton policy has kept the price higher than it should have been. At the same time, it is worth, historically, more than 60 cents per pound. But customers are likely to look at prices now and wonder whether, given the huge crop, they will drop even further. We need to be cautious until we see where this will bottom out.”

In the long run, if prices hold below 80 cents, spinners say cotton market share could rebound. “Over the past few years, since the market went crazy in 2010, more and more customers have turned to blends to protect against the volatility of cotton prices and the potential lack of supply,” said one spinner. “T-shirts that have always been 100-percent cotton, for example, are now cotton-poly blends. And consumers seem to prefer — or at least accept — this change. A permanent correction in the cotton market could be good for all involved. But, again, we are just going to have to wait and see how things ultimately shake out.”

Another concern is that, with end stocks so large, farmers will turn to other crops, such as corn and soybeans. “If cotton farmers can’t make money, they won’t plant cotton. And that, in turn, could create yet another topsy-turvy market situation,” said another spinner.

The pertinent question is whether new market dynamics will bring the recent period of stability to a screeching halt — or will they herald the onset of an even more prosperous period? The answers from most spinners are similar, as summed up by this industry expert: “My crystal ball is a little cloudy at the moment. Ask me again in three months.”

September/October 2014