Price Volatility Could Cause a Bumpy Ride

Mike Watson
Vice President, Fiber Competition
Cotton Incorporated

Cotton markets are in a period of unprecedented volatility. While higher cotton prices are always appreciated by the cotton production segment of the supply chain, the exponential rises in cotton prices are causing disruptions that may have lasting effects.

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Recently, rises — and falls — in the market have shown moves of limit up and limit down in a period of just a few trading hours in multiple cotton markets. This volatility is present throughout the global supply chain, impacting every stage of production and spreading both fear and greed. Rumors of yarn hoarding are circulating with tales of speculators buying and holding entire containers of yarn in anticipation of continued upward price movements. Garment manufacturers are reluctant to take orders because the prices of their inputs are so variable they are unsure how to set prices on their finished products. Some are temporarily shuttering their manufacturing, choosing to ride out the situation rather than take the price risk of operating in this market.

What is behind the price volatility and what, if anything, should the cotton supply chain be doing?

The volatility in the global cotton supply chain has its origins in tight supply and demand. Recent crops worldwide have not kept pace with world cotton consumption. This tight inventory condition was complicated by recent flooding in Pakistan and by poor growing and harvesting conditions in parts of China, reducing cotton supplies in these critical regions. With the United States exporting approximately 85% of its cotton, we are no longer isolated from such events. Nor are we isolated from actions like export limits on cotton by major producing nations or increases in foreign interest rates that can amplify volatility.

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The escalation in cotton prices has already initiated changes in the supply chain. A few spinning plants in China and Latin America are curtailing production due to tight cotton inventories. Other spinners are experimenting with blend levels of cotton and other fibers. More critically, manufacturers, brands and designers are starting to look for other fibers. Movement to synthetic fibers could have a serious and long-lasting effect on the overall cotton business.

With such market volatility and the prospects of permanent market damage, what are the logical actions for the cotton supply chain to take?

In a free market, if your business cannot stay ahead of the competition, you will not stay in business. The free market is a very powerful motivator for product and process innovation. First, now is the time to make the next big push for improved cotton fiber quality, because it will be essential when going head-to-head against synthetic fibers. Second, with our cotton production moving into global markets, we must eliminate logistical inefficiencies in our delivery system and improve cotton flow. Finally, cotton product innovation that creates new and exciting cotton items for the consumer is an absolute must.

This is not the time for the cotton industry to sit on the laurels of our last 40 years of progress. Cotton Incorporated is looking toward the next 40 years and where we need to go to help ensure consumers continue to choose cotton over synthetics.

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