Cotton prices appear to be collapsing again due to the surpluses created by central bank stimulus policies since 2009. As the chart shows, these had initially caused prices to soar to levels not seen since the American Civil War:
- They reached 230c/lb in March 2011, nearly double the post-1982 peak of 117c/lb in May 1995 (blue line)
- But this didn’t last, and prices were soon back at the top end of their historical range at 80c/lb (green line)
This price fall took place despite two major developments:
- A major drought in US cotton-producing areas between 2011-2012, which sharply cut production
- China’s stockpiling of cotton to support farm incomes – its stocks rose five-fold to 58m bales between 2011-2013
Globally this meant there was enough cotton in store to make 3 pairs of jeans for every person in the world.
Thus the scene was set for further price declines. Last March, players began to realise the US drought was over, and that China’s new leadership was now subsidising farmers directly, rather than stockpiling.
December 2014 thus became a key date, as the new US crop would then be ready for delivery. And now last week’s downbeat analysis from the US Department of Agriculture has confirmed everyone’s worst fears.
It forecast 2015 US production would rise 25% and global stocks would rise to 109m bales – with 63m bales in China.
FALLING OIL PRICE CAUSES FURTHER PROBLEMS FOR COTTON
Cotton, of course, competes with polyester in the world’s fibre and apparel markets. And last March, oil prices had not yet begun to collapse. So it seemed possible that cotton could gain market share and hence additional volume.
Today, however, oil prices are already back at $50/bbl. This matters, as the post-2009 jump in cotton prices had also led China to vastly expand PTA capacity (terephthalic acid), the oil-based raw material for polyester.
PTA prices in China have already fallen 45% since mid-August, and will likely weaken further ahead of China’s Lunar New Year holiday on 16 February. So cotton’s brief period of improved price competitiveness is already history.
What happens next? Logic would suggest that both cotton and PTA prices will continue falling:
- China is not going to let its farmers go bankrupt, so it will continue to subsidise production, whilst US farmers have already planted their crop and need the revenue it will produce
- Oil prices also probably have further to fall, especially as world oil stocks continue to build ahead of the refinery maintenance season in March/April
This will be very good news for hard-pressed consumers and retailers. It means apparel prices have plenty of scope to fall quite dramatically, as cotton and polyester battle for market share.
But it will be very bad news for central bank hopes of stimulating inflation. Instead, a collapse in apparel prices will help create the ‘deflation shock’ their stimulus policies were meant to have made impossible.