Low Cotton Prices: A Long-term Problem

Date Posted: 05 Jan, 2015

Despite expected growth in cotton consumption this season, a world production surplus of 1.7 million tons is still anticipated. This will bring 2014/15 world ending stocks to 21.3 million tons, up 9% from 2013/14 and up 147% from 2009/10 when stocks reached a 15-year low. The average world stock-to-use ratio in the 25 years before China began its reserve policy in 2011 was 47%. However, the volume of ending stocks would represent 87% of the projected consumption in 2014/15, and is weighing heavily on prices this season. Even assuming reasonably lower production and higher consumption in the next few years, it will take several seasons for the significant volume of stocks to reach a more sustainable level, and low cotton prices are likely to persist while the market adjusts. By the end of the season, stocks held outside of China are forecast to rise by 20%, to nearly 9 million tons, the second largest volume (after 2004/05) in the last 30 years. Much of this increase will be held by producing countries and will likely cause world exports to fall 15% to 7.5 million tons. 
Last spring, when growers in the Northern Hemisphere made their decisions on what crops to plant, prices of cotton were much higher than the historical average and those of competing crops such as maize. As a result, world cotton area for 2014/15 is estimated at 33.5 million hectares, up 3%. However, world production is estimated down 1% to 26.1 million tons due to reductions in China and the Southern Hemisphere. As a result of the contraction in area caused by changes in its cotton policy and falling domestic cotton prices, China’s cotton production is projected down 7% to 6.4 million tons. In response to low world prices, Brazil’s production is forecast to fall by 10% to 1.5 million tons. Meanwhile, low prices and a significant drought are expected to reduce Australia’s production by 47% to 470,000 tons. India’s production is expected to remain stable at 6.8 million tons due to less favorable monsoon weather this season despite an expansion in the cotton area by 5% to 12.3 million hectares. However, its production will surpass China’s by over 300,000 tons, making it the largest cotton producer in 2014/15. Production in the United States is looking to rebound 23% to 3.5 million tons, partially offsetting declines in the other major producing countries. 
International cotton prices have fallen substantially since last spring, when they were above 90 cents/lb to under 70 cents/lb in December. In response to the low prices, cotton consumption is forecast to increase by 925,000 tons to 24.4 million tons in 2014/15, after falling 1% to 23.5 million tons in 2013/14. Lower international and domestic prices are expected to bolster consumption in China by 6% to just under eight million tons. The contraction in China’s demand for cotton yarn imports is expected to cause India’s cotton consumption growth to slow to 4% reaching 5.3 million tons. This is down from 5% in 2013/14 and 14% in 2012/13 when demand for Indian yarn exports was much stronger. 
The ICAC Secretariat sends their best wishes to all in the cotton and other natural fiber industries for the New Year. 

  2013/14 2014/15 2015/16   2013/14 2014/15 2015/16
          Changes from previous month
  Million Tons   Million Tons
Production 26.28 26.08 24.55   0.04 -0.16 0.00
Consumption 23.46 24.39 24.67   -0.03 -0.01 0.00
Imports 8.74 7.53 7.77   -0.01 -0.32 0.00
Exports 8.86 7.53 7.77   -0.01 -0.32 0.00
Ending Stocks 19.56 21.25 21.13   -0.01 -0.16 0.00
Cotlook A Index* 91 72          
*The price projection for 2014/15 is based on the ending stocks/mill use ratio in the world-less-China in 2012/13 (estimate), in 2013/14 (estimate) and 2014/15 (projection), on the ratio of Chinese net imports to world imports in 2013/14 (estimate) and 2014/15 (projection). The price projection is the mid-point of the 95% confidence interval: 63 cts/lb to 83 cts/lb.

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