It Was a Very Volatile Year
March 13, 2009 Whether we consider the meltdown in the global financial system or developments on the political front, 2008 was truly a year for the record books in terms of terrific highs and terrifying lows. Because this year is characterized by such highs and lows, one word typifies 2008: volatility. The same yearly theme holds true for cotton. Cotton, that basic of all commodities, found its supply, demand and market price buffeted from here to there. This past year has seen cotton prices soar and crash seemingly in line with broader events in the world. In some cases, macro-economic and geo-political developments directly impacted the world of cotton and textiles, while in other cases the price of cotton seemed to take on a life of its own, irrespective of global events.
Shell-shocked traders struggled to keep up with daily fluctuations; I would bet this year set a record for market limit-ups, not to mention market limit-downs. So what’s the net result? Some of the long-time players in the merchandising of cotton left the scene, while we saw some truly profound changes in attitudes towards the purchasing of cotton.
I could write a book on this past year’s developments in the cotton industry, the effects of hedge funds on the trade or the competition brought about by other crops thanks to the boom in alternative energy. Yet I believe we can say that the cotton business has most directly been affected by strong shifts in demand by the global textile industry. In turn, this shift in demand – both in terms of quantity consumed and the quality and varieties used – has directly resulted in many observers wondering what else can possibly be added to the mix. Some of the changes we have seen take hold of the global industry in 2008, in terms of the major cotton producing and consuming regions of the world, include volatility and consolidation in China, the Indian textile industry suffering from overcapacity and U.S. textile consumption lowered.
The Future
So what does the future hold? Will the volatility ease? If history is any indication, periods of commodity volatility are typically followed by periods of relative calm. Although traders may fret over day-to-day or even hour-to-hour fluctuations of a market, when it’s possible to catch one’s breath and look at the market a calming effect has always seemed to follow periods of instability. Remember earlier in this decade cotton prices fluctuated with frequency; those days may return.
Yet, as a cautious forecaster, I have suggested that perhaps they may not. If China continues going through dramatic changes in its textile industry, then what will happen to its consumption of cotton? Will China fall into the same trap that ensnared others? It is interesting to plot China’s textile growth and then graph it opposite historical textile growth in the U.S. China’s textile industry soared while the U.S. industry contracted. But the same thing can be said with the original rise of the U.S. textile industry after World War II; it soared only to the detriment of the industry in Europe.
The U.S. textile industry is now just a shadow of its former self and now even resorts to handouts from the government. What killed the American textile industry? Arrogance was partly responsible, as well as resistance to change. There was always a feeling in the industry that it could out produce mills in any other country. The problem was that it ended up producing products no one wanted. Will China’s textile industry follow a similar path, and what will that mean for producers of cotton?
The volatility of 2008 has made its mark on the global cotton business. Does that foreshadow a change in things to come?
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