Increasing prices and an expected rise in global consumption are giving the U.S. cotton industry reasons to be cheerful in the new year.
This story first appeared in the December 29, 2009 issue of WWD. Subscribe Today.
For more than 12 months, brands and retailers have cut inventories and slashed orders in response to the massive pullback in consumer spending that accompanied the global economic downturn. As they did so, the U.S. cotton industry saw prices plunge, prompting many farmers to move away from cotton in favor of higher-profit crops such as corn and soybeans. However, cotton industry sources now believe the pricing floor has been reached and that next year, even a small increase in global consumption will spell opportunity for U.S. farmers.
According to Cotton Incorporated’s Executive Cotton Update for November, the retail industry experienced 14 consecutive months of declining year-over-year spending on apparel. The report pointed to “stubbornly low end-use consumer demand” stemming from the high unemployment rate and low consumer confidence levels. However, it also noted retailers had fully implemented cost-cutting and inventory-reduction efforts.
The low price of cotton prompted farmers around the world, and particularly in the U.S., to plant other crops. A report released this month by the U.S. Department of Agriculture estimated that U.S. cotton production for 2009 would come in at 12.6 million 480-lb. bales, compared with 23.9 million bales in 2005. Global production for 2009 is expected to be 102.7 million bales, the lowest level since 2003 and compared with a recent high of 122 million bales in 2006, which was followed by declines in 2007 and 2008.
Despite the declines, Cotton Inc. noted in its monthly economic letter for December that the USDA report indicated U.S. cotton farmers were likely to see conditions improve on several fronts. The first area of improvement has been in pricing. The price for a pound of cotton has been steadily rising since August. WWD’s monthly Fiber Price Sheet (see chart) shows a pound of cotton fetching more than 68 cents this week, representing an increase of more than 60 percent from a price of around 40 cents a pound in December 2008.
Prodding those price increases are the first signs of an increase in consumer demand, spurring production in the world’s major manufacturing countries.
“While production figures were largely unchanged, December’s [USDA] report featured the first set of notable revisions to the consumption side of the balance sheet,” Cotton Inc. said in its economic letter. “Globally, consumption estimates rose 988,000 bales [to 114.5 million from 113.5 million bales].” The primary drivers of that demand were identified as China, India and Vietnam.
The better news for U.S. cotton growers is China likely will need to import cotton. As they did in the U.S., low cotton prices pushed Chinese farmers from the crop and those that did stick with it saw lower yields this year. China’s cotton production is expected to be 14.2 percent lower this year, but the country’s cotton consumption is forecast to rise nearly 4 percent.
“As a result, it is anticipated that China will import almost 2 million more bales [to nine million] in 2009-10 than in 2008-09,” said the Cotton Inc. report.
Robert Antoshak, president of FC Stone Fibers & Textiles, a commodity risk management and consulting services firm, said U.S. growers have the advantage of quality.
“The one advantage we have is that our crop is typically cleaner,” said Antoshak. “When they gin it and send it out, generally speaking, it’s going to be cleaner.”
Antoshak also sees rising consumer demand spurring Asian ordering.
“You have a confluence of different trends going on,” he said. “The demand side is looking much better. I think the Chinese have started to get more into the import markets. Their crop is proving to be thin this year, so mills are going to have to go offshore.”
Organic cotton also made gains in the U.S. this year. According to the Organic Trade Association, 10,731 acres of organic cotton were planted in 2009, a 25 percent increase from the 8,539 acres planted in 2008 and the highest number of acres planted since 2001. The amount of organic cotton actually produced was not yet available. In 2008, only 7,026 bales of organic cotton were harvested.