The past months can be characterized as a time with significant uncertainty and volatility in the global economy. The Sino-U.S. trade war has caused sourcing shifts, concern over prices and great tension in the apparel and textile supply chain. Just like a domino effect, the world cotton market is suffering and its prices hitting the lowest within 10 years says most of the story.
The long-term effect on the cotton market is undulating from the farm to the commodities market, with prices taking a sizable hit as the U.S. loses out on its major export market, China. Consequently, the supply and demand dynamic is being greatly disturbed.
USA, the third largest producer of cotton in the world plays a significant role in the global cotton industry. In 2018-19, about 16% of the total cotton production came from USA. But the current scenario isn’t so satisfactory for the farmers and the cotton infrastructure. U.S. spot cotton prices fell to 52.73 cents a pound on August 5, Monday from 53.76 cents on August 2, Friday, according to the U.S. Department of Agriculture (USDA). This is the lowest price for the commodity since 2009. Prices bounced back a bit on August 6, Tuesday, closing at 53.09 cents per pound.
Prices averaged 57.75 cents per pound for the week ending August 1. That was up from 57.71 cents from the prior week, but down from 85.78 cents reported the corresponding period a year ago, USDA reported.
U.S. cotton futures prices for October contracts closed at 57.91 cents a pound on August 5, from 58.94 cents on August 1 and 64.24 cents on July 25. On 6 August, they inched up to 58.25 cents.
Robert Antoshak, managing director of Olah Inc., said, “When the cotton market sees a major export market like China disappear, particularly in a short period of time, the reaction is to contract and prices plunge. That’s because there isn’t any overnight solution to demand, and it is a supply and demand situation.”
Since China implemented a 25 percent retaliatory tariff on imports of U.S. cotton fiber last July, its imports from the U.S. have dropped 44 percent, or 868,000 bales, according to the USDA.
Antoshak said that Chinese buyers always came in and bought the best cotton because they wanted quality, especially for their quality ring spinning. But now, when there’s a large and healthy U.S. crop the situation is getting worse because the Chinese buyers are left asking “now what?”
As for the bottom line on prices, J. Berrye Worsham, CEO of Cotton Incorporated said, “I would say that we’re reasonably close to the bottom. You can’t make money growing cotton at 60 to 65 cents a pound on the futures market. At some point, prices will have to rise to cover costs. Growers would consider upper 70s to 80 cents on the futures market to be not a great price, but something reasonable.”
Before the unrest situation, when there was no trade war, cotton was at around a $1 a pound. According to Antoshak if the prices keep dropping in this trend, a lot of farmers and the whole cotton infrastructure will suffer.