Global Cotton Industry Continues to Grapple with Difficult Supply Situation

Thursday, March 04, 2010

SINGAPORE, March 4, 2010 -- At the first day of the Singapore 2010 International Cotton Conference, a gathering of the world’s leading cotton merchants and spinners, industry leaders outlined many of the problems currently plaguing the business, but offered relatively little advice to how the industry will solve those problems going forward instead opting for a wait-and-see approach to the market.

This is a major industry event as for the first time International Cotton Association has held one of its industry events in Asia, a significant development that represents the growing importance of Asia in the cotton business. In fact, virtually every presentation, mentioned the rise of Asia as the leading consumer of cotton and the major producing region for textiles in the world.

Much of the trepidation on the part of speakers to offer solutions to the current supply shortage in world markets is understandable as it is too early to tell whether increased production in the US -- the world’s largest exporter of cotton -- will be adequate to stave off increased demand for cotton that has been building for some time. Additionally, the supply and demand situation is so tight at this point that a poor crop turnout in either India or China -- the other significant producers of cotton globally -- will more than likely propel world markets to steeply higher prices for cotton over the next year.

The cotton supply situation has become particularly acute as inventories of available cotton have been drawn down globally to meet stepped up demand by textile mills. In turn, textile production has risen significantly over the past six months as the global recession has eased and demand for clothing and home textiles has improved. This ensuing ripple effect of increased demand throughout the textile supply chain has resulted in not only tightening supplies of available cotton but also sharply higher prices. For example, a year-ago cotton prices globally averaged about US 40 cents/lb; today prices are in excess of US 80 cents/lb.

Many industry watchers have looked for prices to rise to as much as US $1 lb, a price level that would cause considerable angst -- and real pain -- in the global textile industry. Yet, the current levels of US 80 cent cotton has enticed many farmers to move from other crops in favor of cotton. Over the past few years, many growers, particularly in the US, moved away from cotton in favor of other higher priced crops used in the production of foodstuffs and ethanol. But with the relative implosion of the global ethanol markets late last year and a resulting decline in demand in ethanol inputs, growers have increasingly looked for alternative crops to plant this year. Consequently, US 80 cent cotton is a strong draw for many farmers.

Yet, a return of cotton acreage could result in yet another round of over-production, a problem that has plagued the industry over the years. Tangentially, with current inventory levels running below sustainable levels in light of the recovery in global textile production, it is possible that any increased production will be readily absorbed by the market. To what extent, however, remains to be seen.

I will add an additional blog post after the second day of the conference tomorrow, along with concluding remarks.

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