Price evolution
The price of cotton recently almost retrieved its pre-pandemic level. Nevertheless, according to John Robinson, PHD, AgriLife Extension cotton economist this will not last.
Indeed, like most of markets during the pandemic the cotton price fell more than 20 cents, from 70 cents per pound to 49 cents per pound from February to April.
What has helped increase cotton’s price is the fact that the Chinese Government began to buy cotton bales to increase their reserves which has helped to obtain a steady upward price.
Moreover, the US climate was not ideal to produce cotton this year, Many US regions such as Texas and Georgia had droughts, multiple tropical storms followed by freezing temperature. This bad weather triggered price speculator buying cotton, which helped cotton to gain back its price of 70 cents as of November.
Pakistan might also be playing a role in the increase of Cotton’s price. Indeed, Pakistan had many of its agricultural crops in several areas destroyed due to heavy rains, pest attacks and locust invasions. The government is under pressure to bring down price of essential goods and support its textile sector (biggest employer) and is therefore planning to import huge volumes regardless of the rates. The fact that the supply is lower than usual due to the bad weather conditions in several producing country, and that the demand is increasing also explains why the price is moving upward.
Supply & Demand
Covid-19 has driven to a collapse in world’s price. According to Cotton Outlook, by the end of 2019/20 the cotton world consumption estimate has fallen from 27million tonnes to below 22 million in just two years. We can see it thanks to the green bars on the graph.
The speed of recovery in consumer demand remains uncertain. The recent apparel imports suffered from a postponed demand as consumers purchases were initially delayed. Furthermore, some lost demand, such as 2020 summer and vacation, clothing school uniforms for some countries, hotel cotton bed sheets and towels, etc, could maybe never be recovered. The remote work and school purchases remains unknown.
The production of cotton for 2019/20 was barely affected by the pandemic. Cotton was already picked in the Northern Hemisphere and was already planted in the South. Nevertheless, the volume of cotton unshipped, unconsumed, or unsold was of potentially catastrophic proportions still according to Cotton Outlook. The rise in world stock during 2019/20 was of around 3.9 million tonnes.
The global cotton production is forecasted at 18.6 million for a 480-pound bale. This means that it increases up by 1 percent from November but down by 11 percent from last year. The futures prices shos us that supply and demand should increase, mostly during spring when seeding will begin.
Forward Curve
The December future contract being at its end with 20 cents up, we can see that all cotton futures have slightly increased accordingly. We are still in a contango situation (Price on the 3rd of December 2020: 69.99) and it may still increase if the COVID-19 pandemic stabilizes.
Recommendations
Bad weather condition in several producing countries and the still ongoing COVID-19 pandemic is still affecting the forecast of cotton prices. And with the fact that the futures price is on the rises at least until July 2021 where it will be valued 73.510 we recommend to go long on cotton investment.
Sequeira Reny, Tiago Marques & Nicole Peytregnet
Bibliography
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