Lost in Tall Cotton: Why Cotton Prices Differ Around the World

Tuesday, May 07, 2013

For apparel brands and mills, tracking the cost of cotton—and determining the best time to buy cotton—is often an exercise in confusion and frustration. Prices change, due to a host of factors, and buying at one time versus another can mean the difference between paying less than $1 per pound to paying well over $2 per pound.

Brands and mills have two questions about cotton. The first is whether or not the price of cotton will go higher or lower. The second is why the price of cotton in the United States is different from the price in China? Or India? Or Pakistan? Or, pick a country?

The fact is that cotton prices can and do vary widely around the globe, much like the cut of clothes varies from brand to brand. As of this writing, the price for cotton in New York is about 85 cents per pound, while in Delhi the price is over $1 per pound and in Shanghai over $1.30. Which is the correct price? The answer is: They all are.

There are numerous types of cotton grown around the world. To name just a few, there are Texas FiberMax®, Memphis Eastern, Egyptian, Pima, Australian, SJV, Shankar 6, West African, Xinjiang, with many subtypes of cotton within each major cotton-growing region. Because of this complexity, growing patterns can easily change from season to season as farmers try to select those types of cotton most likely to give them the most return on their investment. Moreover, farmers may opt to grow other crops, such as corn or soybeans, in addition to or instead of cotton. If alternate crops take available acres away from cotton, prices can be significantly affected.

Weather adds another layer of uncertainty. Droughts and excessive rainfall can dramatically affect the cost of cotton. For example, the price run-up that occurred in 2011 was due, in part, to flooding in Pakistan that wiped out much of the domestic cotton crop there. In turn, this forced local mills to import cotton from the United States and elsewhere, which created more demand—and thus higher prices—than would otherwise have been the case.

Add to this the lack of a centralized, global cotton market. Instead, each market acts independently, according to government policies, allowing local supply-and-demand issues to skew the price of cotton from country to country.

For example, in 2011, the government of India, in a bid to lower cotton prices for Indian textile mills, imposed an export quota. In effect, this action took one of the largest producers of cotton out of the global market. Cotton soared to over $2 per pound everywhere, except in India, of course, where cotton prices fell. And this year, the government of China has purchased and stored huge quantities of cotton—some estimates put the Chinese reserve at more than half of the world’s cotton—in an effort to help prop up the price of Chinese-grown cotton. This action has had the result of taking a sizable percentage of the global available supply of cotton off-line. With reduced global supply, prices in New York, for example, have risen from about 65 cents per pound to about 85 cents per pound.

Contributing another layer of uncertainty are futures exchanges. There are relatively few cotton futures contracts around the world, so hedging against price hikes or declines is difficult from a global perspective. In theory, there is a way to hedge costs over the long haul by using Intercontinental Exchange (ICE) futures prices as a guide. Although ICE only tracks one style of cotton, futures prices all other styles of cotton depending upon quality and availability. Higher-value cotton, in essence, has a way of finding a futures price. Futures exchanges are essential in establishing some basic level of price discovery. There is a problem, though: Not all companies around the world are permitted by their governments to trade futures. Local exchanges have sprouted up to help fill the need—for example, the MCX in India and ZCE in China—but these exchanges track local prices and are not representative of broader global price levels.

All of this can leave mills and brands not only confused and frustrated but also vulnerable. As there is no really true way to measure the global price of cotton other than the ICE price, which acts as a surrogate for global prices, there is no simple way of tracking the global price of cotton other than to become a terrific market researcher.

There are two information sources that allow cotton consumers to keep abreast of the global (and local) market for cotton. First is the Cotton Outlook website (www.cotlook.com), which tracks the latest in prices around the world. The other is the International Cotton Advisory Committee website (www.icac.org), which tracks the latest global supply-and-demand estimates and forecasts.

When looking at the global market for cotton, buyers have to consider complexity, crop competition, weather, government actions, and futures exchanges. The best tool that sourcing companies have to wade through this flood of conflicting forces is to anchor themselves by gathering as much information about the market as possible.

For now, it appears that prices may decline in the short run, but that can change if the weather wreaks havoc or if some new government policy affects the normal trade of cotton. Here’s the point: Don’t leave next year’s sourcing decisions to chance.

Note: This article was originally published in California Apparel News.

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