Strong export demand to China amid falling global supply boosted cotton futures at the end of August to 7.5-year highs.
The benchmark intercontinental exchange (ICE) cotton contract for October delivery hit 7.5-year highs at 96.27 cents a pound (lb) on 27 August. Although prices have since fallen, they have been hovering above 95 cents so far in September.
What are the factors driving cotton prices? And what’s next for the market? Read on to find out.
Cotton price chart: What has been happening to the commodity so far in 2021?
Cotton futures started the year at 77.31 cent a pound and climbed in the first two months of the year on recovering demand post-COVID-19. The uptrend was halted in late February as Europe imposed lockdown measures amid a third wave of COVID infections, while clothing-manufacturing countries India and the Philippines also experienced a spike in cases. The boycott of cotton from Xinjiang (the key cotton-growing region in China) by Western retail brands further compounded market uncertainty.
To maintain its garment-export market share, China used foreign cotton, leading to rising imports into the country. The strong Chinese demand boosted the cotton market and the price rebounded by late March. The October 2021 cotton contract fell as low as 77.2 cents a pound on 25 March before recovering to above 80 cents in early April.
The rally over the past few months pushed cotton prices past the 95 cents level, but it remained significantly below the record high in 2011 amid a global supply shortage. According to the cotton historical prices chart, the ICE March cotton contract hit an intraday peak of $1.9455 a pound on 11 February 2011.
Exports to China at record high in MY20/21
US cotton exports to China surged to 1.2 million tonnes in the first 11 months of marketing year (MY) 20/21, more than doubling from the 0.47 million tonnes in MY19/20. This pushed the US share of China’s cotton imports to 45%, according to data from the US Department of Agriculture (USDA).
According to the report, which was published on 10 September, “US exports to China were the largest in eight years, with demand for US cotton mostly led by China’s State Reserve.”
The report further stated that:
This strong China import demand is expected to support the cotton market rate.
Under the Phase One Agreement signed in 2020, the US will cut import tariffs on some Chinese goods in exchange for China’s commitment to purchase more American farm, energy and manufactured goods. In addition, China will also address the US's complaints about intellectual property. As part of the agreement, China pledged to increase purchases of American products and services by at least $200bn between 2020–2022.
According to the USDA’s quarterly trade forecast, the US agricultural export for the full-year (FY) 2021 is expected at $173.5bn, 24% higher than the previous year and nearly $17bn above the previous record set in FY2014.
US farm and food exports in FY2022 are forecast to grow again to $177.5bn, 2.3% or $4bn above the record year of 2021.
The United States Department of Agriculture (USDA) said: “Exports to China are forecast at a record $39bn due to higher soybean prices and strong demand for sorghum and cotton. China is expected to remain the United States’ largest export market, followed by Canada and Mexico.”
There is strong import demand of soybean, corn and sorghum into China, with the majority of these agricultural imports being used as animal feed. China is rapidly rebuilding its hog population after the African Swine Fever decimated the country’s farmed pig in 2018 and 2019.
The rising consumption of soybean, corn and sorghum in animal feeds in China has been pushing these agriculture commodities prices to multi-year highs. Despite the increases in cotton, the market lagged soybean and corn prices. The higher prices of other agricultural commodities are incentivising farmers to plant the more profitable crops, leading to lower cotton production in the US in 2020/2021.
Falling global cotton production in 2020/2021
According to USDA data, global cotton production in 2020/2021 is expected to fall to 24.471 million tonnes in the season beginning 1 August, down 7.4% compared to the previous year.
Output in the US, the world’s largest exporter by volume, crashed to 3.181 million metric tonnes, down 26.6% compared to 2019/2020.
Production in India, the world largest cotton producer, is also forecast to fall by 1.7% year-on-year (yoy) to 6.162 million tonnes in 2020/2021. In contrast, China’s cotton output is expected to rise by 8.3% year-over-year to 6.423 million tonnes and production in Australia more than quadrupled year-over-year to 610,000 tonnes.
Lower global cotton inventory is also underpinning the market. The global ending stock is forecast to fall to 91.302 million tonnes in 2020/2021, down 7% from the previous year. Ending stock is a stocks-to-use indicator; lower stock indicates higher demand and vice versa.
Improving textile and apparel demand in 2022
China cotton imports are forecast at 2.6 million metric tonnes in MY2021/2022, a drop of 200,000 tonnes from the previous year, data from the Chinese Office of Agriculture Affairs show.
Cotton consumption in China is forecast to rise to 8.7 million metric tonnes in MY2021/2022, up from an estimated 8.6 million tonnes in MY2020/2021. According to the Chinese Office of Agricultural Affairs, the higher consumption is driven by improving domestic and international demand for textiles and apparel as the global economy recovers from the Covid pandemic.
However, the report warned that cotton demand could be uncertain because of “the economic impacts of COVID-19 on consumer behaviour and retail habits”.
China is the world's largest consumer of cotton, accounting for one-third of total cotton mill use. Among other major consumers are Bangladesh, Vietnam and Turkey.
According to the USDA, global cotton consumption is expected to increase to 46.759 million bales in 2021/2022, up from its previous forecast of 46.251 million bales. Consumption is also expected to rise in Pakistan and Bangladesh while demand in Vietnam is lower because of mill shutdowns.
Cotton price outlook: what’s next for the soft commodity?
Analysts at FXStreet said the supply fundamentals for the commodity remain bullish. In their cotton price analysis, they said:
Agricultural product data provider Mintec has made a cotton price prediction earlier in February, suggesting that the market would remain bullish this year. Mintec said: “Cotton farmers switched to more profitable crops such as soybean and maize (corn), due to high demand in the Chinese market, undermining cotton planted-area growth. Similar trend of crop switching is expected to be seen in 2021/22 MY. Chinese demand for soybean and maize (corn) has been fuelled by a rise in feed production to support the country’s hog rebuilding activity.”
However, the COVID-19 pandemic and resurgence of new cases will continue to cast a shadow over the global economic recovery, as lockdown measures could halt or slow manufacturing activities and consumer spending.
US industry association Cotton Incorporated noted in a report in August: “Another factor to watch for price direction remains COVID. The spread of the Delta variant has already led several important manufacturing countries (e.g., Vietnam) to introduce protective measures that have shuttered factories.”
When considering analyst commentary, it’s important to bear in mind that they can get their estimates wrong. You should always do your own research, taking care to consider all relevant market conditions.
Global cotton supply and demand for textile and garments are key drivers for cotton prices. Changing consumer demand and supply disruption, which could lead to lower cotton production, may affect prices.
Cotton prices have been rising this year due to recovering demand amid lower supply. With the global economy reopening after COVID-related lockdown measures, increased consumer spending has lifted demand for textiles and garments. This has boosted cotton consumption.
However, cotton supply is falling as farmers are choosing other more profitable crops.
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