The price of cotton per pound is at levels not seen since the Civil War and it doesn’t look like things will abate anytime soon.
That was the message from Mark Messura, senior vice president of global marketing supply chain at Cotton Incorporated, who presented a cotton market analysis Wednesday at The Union League Club to industry executives. The event was sponsored by The Intimate Apparel Council, a division of the American Apparel and Footwear Association.
“What’s going on in the cotton market is unprecedented,” said Messura. “A fundamental balance has tightened with exported crops nearly sold out worldwide, exported crops in China [the world’s largest cotton producer] close to sold out.…Ninety eight percent of U.S. cotton exports are already sold out on paper.…World production [of cotton] has dropped dramatically, by 40 percent, because farmers are planting more corn and soy crops. The real culprit is ethanol.”
He added that China’s focus on food crops to feed its population of 1.34 billion outweighs the merits of cotton production.
“China will not produce enough cotton because food is far more important. They need over 30 million crops [cotton bales] a year. When China shops the world for cotton, the market shoots up.…China promoted an incentive to its farmers last month to plant cotton for a guaranteed $1.36 a pound. That tells us cotton is in short supply in China.”
Messura pointed out that natural disasters, such as those that ravaged farmland in Texas, the biggest U.S. producer of cotton, are compounding the problem since cotton is planted in the spring and sold in the fall. Mill consumption of cotton continues to outpace production as well, an issue Messura described as a “fundamental mismatch.” For example, estimates for worldwide cotton production for 2010-11 are 114.5 million bales against mill consumption of 117.1 million, he said.
He further noted that in the long term, the uncertainty and volatility in the market will have a far more negative effect on mills, suppliers, manufacturers and retailers than higher prices.
“This kind of volatility is not narrowing the problem, it’s amplitude is still creating a problem.…I would really be hard-pressed to say cotton prices will drop to $1, but I see a correction in the market, fundamentally a short amount of cotton moving forward until December,” said Messura.
He outlined a snapshot of what to expect for the second half of 2011.
“Where are prices likely to go? Brazilian companies are starting to harvest now for around $1.65 a pound for August-September deliveries. Companies buying cotton for deliveries in the fall are averaging $1.60 to $1.65, and December contracts available now are about $1.28,” he said.
As for why cotton prices have reflected a slight decline in the past month, Messura cited two main factors: a reduction intextile orders as retailers continue to adjust inventories and cut back, and the impact of China’s most powerful mill reduced its offering price by 14 cents in April. The price for cotton per pound on April 25 was $1.84 compared with $1.97 March 28, according to the WWD Fiber Price Sheet.
Looking ahead, Messura said, “I would anticipate high prices to continue over the next several months, in the $1.50 to $1.80 range. Mills without firm deliveries over this period are at risk.…More planting this year may not necessarily result in larger crops. The most vulnerable will be the spinners and fabric mills that are not vertical. There could well be a shortage of basic cotton fabrics, reduced production, and possible closures. Fiber substitutes are not that simple and there are issues of duties. And prices for polyester and rayon are also high.”
Regarding how strongly manufacturers and retailers are being impacted, Messura said companies are being asked to pay up front before commitments are honored.
“We’re already seeing a shifting of cash flow in the supply chain. Lots of companies are bringing their chief financial officers to meetings…they are being asked to pay 30 to 100 percent up front,” said Messura.
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