News & Price fluctuations
Cotton price (7th January 2021 : 80.25$) is higher than at the same time last year and it is at its highest level in nearly two years, thanks to a lack of rainfall in key-growing regions that has reduced expectations for the current crop. The U.S. Dept. of Agriculture expects the smallest domestic crop in five years. We can also add the recent scandal on forced labour in China (which produces 85% of China’s cotton and 20% of the global supply) that has put off many clothing makers and the US has banned China’s cotton in response to the scandal. All these events explain the rise in price of Cotton.
Cotton Supply & Demand
According to the latest estimate of the US Department of Agriculture made in December 2020, the imports of cotton are projected at 43.2 million bales which is 7.4% above last season. This major increase is mainly due to China which increases its imports due to higher local prices.
Production is projected at 113.9 million bales which is 8.2 million bales less than last season. The major reductions are in the United States, Brazil and Pakistan because of severe weather issues such as droughts, floods, hurricane, and so on that resulted in many abandoned acres.
Consumption is projected to increase by 13% to 115.6 million bales in 2020/21. This is mainly due to the fact that Covid-19 and the slowdown of the world economy it has caused, has led to a major reduction in world cotton demand in year 2019/20, so it is quite easy to perform better in 2021. Nevertheless, Covid-19 has not disappeared yet, and therefore 2021 brings its lot of uncertainties as well, even though the hope created by the vaccine has led to more optimistic projections for 2021, these projections are still below the volumes from previous years that were over 120 million bales.
World stock of cotton are expected to decrease in many countries this season mainly because of the above-mentioned reasons, but it will be partially offset by an increase in production in India. China’s stock continues to decrease, nevertheless it remains the largest cotton stockholder in 2020/21 accounting for 37% of global cotton stocks.
The latest cotton supply and demand estimates show that world cotton stocks are projected to decrease by 2% in 2020/21 to 97.5 million bales against 99.4 million bales in 2019/20.
This could explain our future curves which is in contango till July 2021 and ends up in backwardation between July and December 2021. It could be explained by the fact that as we have seen demand will be higher than supply in 2020/21. We might imagine that till July 2021 the contango is explained by the fact that the 2019 crop will still be available until then.
Recommendations
The recent events concerning forced labour and the fact that USA has banned China’s cotton affects the price on the rise. That is why we need to have a close look at what is happening in these countries and how the market will change with the covid19 pandemic.
Futures prices are arising at least until July 2021 where it will be valued at 81.4 USD, so the best action to take for now is to go long on cotton investment.
Bibliography
BATHA, Emma, 2020. China accused of forcing 570,000 people to pick cotton in Xinjiang. Reuters [online]. 15 December 2020. [Viewed 4 January 2021]. Available from: https://www.reuters.com/article/china-cotton-forced-labour-trfn-idUSKBN28P2CM
CAMPICHE, Dr Jody, 2020. GOODBYE 2020: Cotton Outlook Hinges on Economic Recovery, Demand. Cotton Grower [online]. 28 December 2020. [Viewed 5 January 2021]. Available from: https://www.cottongrower.com/market-analysis/goodbye-2020-cotton-outlook-hinges-on-economic-recovery-demand/
Cotton Market Fundamentals and Monthly Cotton Price Outlook, [no date]. [online]. [Viewed 4 January 2021]. Available from: https://www.cottoninc.com/market-data/monthly-economic-newsletter/
Cotton No. 2 Futures | ICE, [no date]. [online]. [Viewed 5 January 2021]. Available from: https://www.theice.com/products/254/Cotton-No-2-Futures/data?marketId=5739902&span=2
Cotton Prices Rise as Lack of Rain Shrinks Crop – WSJ, [no date]. [online]. [Viewed 4 January 2021]. Available from: https://www.wsj.com/articles/cotton-prices-rise-as-lack-of-rain-shrinks-crop-11609764658
CT1 Commodity Quote – Generic 1st “CT” Future – Bloomberg Markets, [no date]. [online]. [Viewed 7 January 2021]. Available from: https://www.bloomberg.com/quote/CT1:COM
ICAC, [no date]. [online]. [Viewed 6 January 2021]. Available from: https://icac.org/News/NewsDetails?NewsId=2336&YearId=2020
WWW.FIBRE2FASHION.COM, [no date]. Global cotton prices now exceed pre-pandemic levels: USDA. [online]. [Viewed 5 January 2021]. Available from: http://www.fibre2fashion.com/news/textile-news/global-cotton-prices-now-exceed-pre-pandemic-levels-usda-271380-newsdetails.htm