Cotton Prices Supported by World Demand
May 27, 2011 Well, the headline is a little misleading. A key adjective describing demand is absent. Over the years I have often heard individuals state the following: “If every person in China was to buy a t-shirt, the global cotton demand would expand exponentially.” This statement is true: China’s economy is growing as is their demand for higher value products such as cotton. However, cotton demand is not the overriding factor supporting cotton prices. It is the desire of every Chinese person to purchase additional protein.
China’s middle income class, currently estimated at between 300 to 350 million people, is growing and looking to improve their quality and quantity of food. Their desire for protein – either from poultry, pork or beef – is applying domestic and global pressure for grains and feedstocks. However, I believe that the potential protein demand has only scratched the surface. This comes from hearing comments about the March release of China’s 12th Five-Year plan focusing for the first time on income stability and disposable income. A lot of attention during the formulation of this plan related to the income growth disparity between urban and rural areas. Consideration is specifically targeted to expanding income to the poorer rural areas. These individuals’ incomes have not been keeping up with inflation and now the government would like to see their income purchasing power double over the next five years.
This also falls in line with the Chinese government looking to reduce the trade imbalance by increasing internal consumption. Basic developing economics notes that the biggest spenders on a ratio per-capita income base are those with the lowest incomes. They take any additional earnings and spend it on disposable necessity type items. Initially, additional funds will improve food requirements, followed by fuel for household needs and then clothing. This would impact approximately 800 million people and exasperate the global demand for food and feed land area at the expense of cotton plantings.
With current worldwide tightness of food and feed stocks, coupled with the ongoing dryness in several large producing and populated consuming countries,these governments are incapable of reducing grain or oilseeds for the sake of cotton. Food security and/or bans have become more of the norm recently, indicating that global stocks are not always truly accessible to the market place.
Now back to cotton: First, the rise in incomes mentioned before are lowering China’s competitiveness of spinning and manufacturing textile products. Second, sourcing patterns are shifting and those countries (India, Pakistan, Bangladesh and Vietnam), in close proximity with low wages should benefit. It is also allowing spinners and textile manufactures around the globe to become viable once again. Third, internal demand for fashionable cotton products is rising and more of the local manufacturing is focused on the new young employed Chinese consumer. Finally, I believe the game-changer in five to 10 years will be when China imports transition from raw cotton and yarn to becoming a large importer of finished textile and apparel goods.
Cotton at the current price will bring in additional acres around the world, however, most likely not to the extent needed to relieve our tight situation. I believe until the world has a bumper food crop, cotton acres will remain under pressure. This was most recently observed in the USDA’s Prospective Plantings at 12.6 million acres, up 14.5%; nevertheless, many thought that figure should be 600,000 to a million acres higher. A similar scenario may hold true for the world as well with a larger cotton area, but not at a colossal level that some may be expecting. Now all we can do is wait and see what happens as farmers enter the fields across the Northern Hemisphere to start their plantings.
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