Forget Bulls and Bears, Think Elephants and Dragons
March 27, 2009 As the 2007 Northern Hemisphere crop is harvested, ginned and warehoused during the remainder of the year, both merchants and mills will keep a close eye on the global cotton market, hoping that necessity and price will join hands in a marriage that will optimize their buying decisions. As that story unfolds, many factors enter the equation from both ends of the cotton supply chain. Will consumer demand, the ultimate driver for the market, continue to rise in both developed and developing countries? If so, will production be able to meet those demands? How will this affect the price of cotton, an important variable cost of any spinning operation?
Price is a tricky thing to predict, especially when looking a year or more into the future. When looking at future buying decisions, market analysis and consideration of the structural shifts shaping the industry provide the best insight into the current and future situation. Accurately predicting cotton’s price is a tough feat, but by understanding market developments, we see what forces influence supply, demand, and ultimately price.
Asia’s Heavyweights
For Phil Burnett, president and CEO of The Seam, cotton’s online trading platform, a discussion of global markets begins with India and China, the two largest cotton producing and consuming countries in the world. That’s no surprise, except for the fact that Burnett focuses on India’s smart growth — both in the production and textile sectors. China may be the looming giant and the obvious mammoth in the cotton industry, but India’s controlled, sustained growth certainly is a major factor in its future potential.
“One of the big factors that we have all watched over the last few years is the impact of India and what’s happening there with their improved yields due to technology and seed varieties. And of course there has been growth in the Indian textile market at the same time. Last year, India exported cotton, and most observers expect that trend to continue. We will see how they can grow their production to cover the increased use and exports,” Burnett said.
While India is perhaps the most interesting factor in the global supply and demand picture, Burnett is quick to include the other countries that make up cotton’s trinity — the fastest growing cotton-consuming countries in the world. Pakistan’s spinning industry continues to grow and exert its influence on consumption (the country ranks third in consumption at an estimated 12.5 million bales next year), while China ranks first in demand and consumption. Guessing the crop size is difficult for China, a country whose numbers are often disputed, especially since the country could have one million bales of “unaccounted for” cotton in storage. But one thing is certain, and Burnett agrees, “China has a very good crop this year, and it may be the largest crop they have ever had.”
U.S. Reduction
Another factor, and an unknown variable to the supply and demand equation, is the current U.S. crop. Production in the U.S. will be down significantly due to the decrease in cotton acres – 11.8 million – because of elevated grain prices, but the crop’s size and condition will not fully be known until it hits the gin. A smaller crop isn’t necessarily bad if carryover from the last several substantial crop years is pushed through the pipeline.
“The U.S. is coming off of two years of large crops, and U.S. merchants have been steadily working down inventory. We are all anxiously awaiting the new crop to see how it is going to turn out,” Burnett said. “We wonder what impact this late heat wave is going to have on what appeared to be a really good Mid-South crop, and so far Texas has had an outstanding growing season.”
Regardless of the crop size this year, U.S. cotton acres probably will not see a major increase in 2008 due to elevated grain prices. Once the U.S. carryover is brought down and grain acres have stabilized, which will most likely become evident in 2009, cotton acres could rise. But don’t expect a dramatic and sudden shift.
“Cotton economists around the world are trying to determine the impact of ethanol on corn and soybean acres in the U.S. Cotton Belt. There was a significant shift away from cotton into grains this season, and many are predicting that trend will continue next year. Again, we are in a period of transition, and we are all going to look to the spring to see what acres are going to be planted to cotton in the coming year. The best indicator, of course, is the futures market, and it is already beginning to send signals about what will be planted next season,” Burnett said.
Next Year and Beyond
What do these major trends portend for 2008? On the supply and demand side globally, it could be the largest crop ever, driven by China’s added acreage and India’s gains in yield. Those countries alone will offset lower acreage in the U.S. But demand will rise as well. With a growing global population, more people in general will have to be clothed. But the rising middle classes in India, China and upper-echelon developing countries will contribute the lion’s share of future demand, as they earn more disposable income to spend on clothing and home textiles.
Finally, consumer tastes in the U.S. and Western Europe are continuing to demand high quality, value-added clothes and textiles. These consumers are very conscious of style, comfort and sustainability; cotton trumps man-made fibers in these categories, making it the fiber for discriminating tastes worldwide. Entering 2008, supply and demand seem to be increasing, indicated by the parallel rising lines on any global cotton chart. This should mean relatively stable prices for the next year, but caveat emptor: There are many unresolved questions in the global cotton industry, and only time will reveal which market pressures will end up on top.
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