What are key drivers of cotton prices?
- Supply & Demand:
Cotton is a highly global commodity and world cotton production and consumption estimates are often used to examine how much supply is available relative to demand. When stocks increase (more cotton is grown than consumed in a given year), prices tend to fall. When stocks decrease (more cotton is consumed than is grown in a given year), prices tend to increase. To relate supply to demand, the stocks-to-use ratio is commonly applied.
- The Value of the US Dollar:
As with most commodities, cotton is most commonly traded in dollars. Consequently, there is typically an inverse relationship between the value of the dollar and cotton prices. When the value of the dollar decreases, cotton prices tend to rise. When the value of the dollar increases, cotton prices tend to fall.
- Government Actions:
Cotton production is an important element of many economies. To support the income of cotton farmers last year, governments both in China and India purchased large amounts of cotton. This reduced the amount of excess cotton weighing on the market and may have prevented cotton prices from falling farther than they did. In the time since, the inventories accumulated in both countries have largely disappeared as world mill demand has recovered. Restrictions on trade, such as the import quota system in place in China, have influenced trade patterns in the 2009/10 crop year.
What is the current state of the cotton market?
- Prices have rebounded following the steep decline that coincided with the onset of the credit crisis. The recent rebound, which began in March of 2009, corresponded both with declines in the dollar�s value and projections of a large production/consumption gap in the current 2009/10 crop year. The 2009/10 production/consumption gap produced the lowest stocks-to-use ratio in fifteen years (44.4%).
What are your projections for cotton prices for the remainder of 2010?
- Short Term:
(until supplies from the upcoming 2010/11 crop become available): Flat to rising prices due to the 2009/10 production/consumption gap. If improvement in the global economy accelerates before the 2010/11 crop becomes available, prices could find even greater support from supply and demand.
- Longer Term:
(fall of 2010 through the end of the 2010/11 crop year): Mixed price pressures due to increased cotton production that may or may not be sufficient to offset rising cotton demand accompanying the global economic recovery.
- The increase in cotton prices in 2009/10 has outpaced any price increases for crops that compete for cotton acreage and is expected to encourage greater cotton planting in 2010/11. Attractive cotton prices were cited as a factor contributing to the 10.3% increase in U.S. cotton acreage 2010/11 projected in the National Cotton Council's recently released Early Season Planting Intentions Survey and the 10.5% increase in world production forecast in the USDA's Cotton Outlook. Expectations for higher world production in 2010/11 may also be expressed in NY futures prices, where the July 2010 contract (2009/10 supply) has been consistently trading higher than the December 2010 contract (2010/11 supply).
- There remain several months before next season's supply becomes available and farmers' planting decisions could change if there are changes in the relationship between cotton prices and the prices for other crops. Another source of uncertainty is the dollar's value. General expectations are that the dollar will strengthen against other major currencies. If the dollar does advance, it could contribute some downward pressure on cotton prices.