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Cotton

cotton analysis

Cotton is a basic crop that is a major input for the textile, agriculture, and food industries. 64 percent of cotton is used for apparel, 28 percent for home furnishings, and 8 percent for industrial products. In the US, $120 billion of business revenue is stimulated by cotton. The U.S. is a major cotton producer, but its domestic textile industry is relatively small, so it exports much of the cotton it produces. In 2007, 97 percent of US net domestic consumption of cotton was from imports, even though an estimated 27 percent of those cotton goods contained US cotton.

Overall, China is the largest producer and consumer of cotton, accounting for 29 percent of the world’s production and 43 percent of the world’s use of milled cotton in 2007. China manufactures apparel and other textile products from the milled cotton, often for export. Demand in this and other emerging markets is a leading driver of cotton prices, as are seasonal growing conditions and the prices of competing crops. Higher corn and soybean prices due to the production of biofuels makes those crops more attractive to growers, displacing cotton production and driving up prices. In 2008, US cotton acres were down 30 percent, to 11 million from 15 million in 2007. Demand for cottonseed, a significant byproduct of cotton production used in the food industry and for animal feed, also influences cotton prices.

Higher Cotton Prices Help Producers And Funds

Cotton farmers benefit from higher prices. However, the prices of competing crops such as corn and soybean are also very attractive and have contributed to smaller cotton production.

Polyester is a synthetic fiber that becomes more attractive with higher cotton prices. Polyester fiber producers include Nan Ya Plastics Corp (TPE:1303), Sarla Performance Fibers Ltd (BOM:526885), and Wellman Inc (OTC:WMANQ).

Textile Manufacturers Hurt By Prices

Clothing, footwear, and industria textile manufacturers are hurt by rising cotton prices. For example, cotton is the primary raw material for Hanes brands, representing 6% of cost of sales, and an increase of $0.01 per pound in cotton prices translates to a $3.3 million increase in annual raw material costs! However, the effect of this on company earnings is uncertain because the effect of cotton prices on industry selling prices cannot be determined.

In the US, 27 textile mills closed in 2007 and industry employment fell by 51,000. While higher cotton prices are not helpful, the US plant closings are mostly due to increased competition from Chinese imports.

Cotton Supply & Demand

Cotton prices have spiked significantly in recent years. The International Cotton Advisory Committee forecasted a season-average Cotlook A index of 79 cents per pound for 2008/09, which represents a 6 cent increase over the 2007/08 average. The price increase is due to a slight expected decline in worldwide production from 26.2 to 25.9 million tons due to competition from soybeans and grains. Global consumption exceeded production in 2008/09, which left the world cotton stocks down by 6% to 11.3 million tons. Imports to the rapidly developing mainland China steadily increased and drove a 5% increase in global imports in 2008/09, while imports by the rest of the world decreased.

Factors That Drive Cotton Prices

  • Grain prices: higher grain prices make them more attractive to cotton farmers, which leads to a decrease in cotton production. U.S. farmers planted 10.54 million acres of cotton in 2007, a 30 percent decrease from the previous year. More growers planted more corn and soybeans at the expense of cotton, especially for the production of biofuels.
  • Cottonseed prices: cottonseed is a byproduct of cotton production and is used in agriculture for animal feed and in the food industry to make cottonseed oil. Cottonseed production decreased in 2007 to 6.60 million tons, from 7.35 million the previous year, which helped to drive both cottonseed and cotton prices up.
  • Good Ole’ Climate Shifts: growing conditions vary from year to year and is a main driver for all crops, including cotton. In particular, droughts can have a devastating effect on crops and can lead to higher abandonment and prices. Accurate forecatsing can be provided as a component of agriculture and the desire to smooth this risk.
  • Synthetic fabrics: competing fibers such as polyester puts pressure on cotton demand. Many mills are shifting toward cotton/polyester blends, which are more durable and easier to maintain than pure cotton fabric. Polyester surpassed cotton as the most used fiber in 2003.

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