Price discovery for the world’s cotton market shifted in 2014 from the U.S. market to that in China. The Chinese government’s decision to implement a “free market” in cotton trading – even though it is a “black magic free market” – has moved China to the forefront with respect to world price discovery.
Their actions throughout 2015 and into 2016 will continue to be the primary market fundamental facing the cotton market, both in the U.S. and around the globe. But world production will see a major reduction in 2015.
China’s acreage could fall as much as 30 percent as the government restricts cotton planting outside the autonomous Xinjiang region and shifts some Xinjiang acreage to food crops. Brazilian water shortages, coupled with planting seed disappointments, will create as much as a five percent reduction there. Australia is also facing a significant water shortage and cotton acres have already been reduced for 2014/15.
In the U.S., water allocations in California and Arizona will force a reduction in plantings as well. Both the Mid-South and Southeast will see marginal acreage shifts out of cotton due to shifts in the price ratios with competing crops.
Taking a profit in the year ahead will challenge cotton growers, but the challenge will be one they have very successfully met before. It is not just the supply and demand of cotton that is important. It is the supply and demand for high quality cotton that trumps other market fundamentals. The ability of growers to take profits in 2015 and 2016 will be directly proportional to the amount of high quality cotton they produce.
While the world is awash with cotton, the availability of high quality is extremely limited and –considering the projected acreage cuts – will face additional shortages in the coming 24 months.
Led by Southwestern growers, U.S. quality has improved and expanded over the past decade. Today, the international textile spinning sector recognizes this cotton as some of the very best in the world, making the U.S. the world’s primary shopping center for high quality cotton. It is incumbent on growers to select planting seed with a proven record of having the quality traits textile mills require.
China will continue to be a significant importer of U.S. cotton. They will need high quality machine-harvested cotton to mix with their own cotton to produce a quality yarn. And, now that China has mandated reductions in the land area devoted to cotton, Chinese mills will need U.S. cotton just to maintain their quality needs.