Heavy supply, weak demand soften cotton


Cotton is used in such a vast array of products, from T-shirts to teabags, that it is hard for investors to think of it as anything but a good thing.

But the fact that cotton is everywhere is part of its problem. Recent over-production has put pressure on prices.

World cotton production this year – for the season from August to July – will jump 9.4 per cent to 26.75 million tonnes, according to the Economist Intelligence Unit (EIU).

Higher cotton prices led to more planting in the Northern Hemisphere, as farmers sought to reap the rewards.

Similarly, in India, good growing conditions coupled with higher planting of genetically modified cotton seed boosted output.

Unfortunately for the cotton industry, the EIU has cut its forecast for consumption of the commodity in the same period to 23.75 million tonnes, a year-on-year decline of 1 per cent.

A year ago, cotton futures were trading at 118.40 cents a pound. This has fallen to 91.30 cents.

Lower consumption levels from western markets suffering a period of austerity have tightened conditions for the global textile industry, adding to cotton investors’ woes.

China, the world’s largest textile producer, is expected to cut its cotton imports by 1 million bales in 2012-2013, according to figures from the US agriculture department. EIU figures suggest cotton supply will continue to exceed demand until 2014, which could create further downward pressure on prices.

Speculation was a significant contributing factor to the recent dramatic volatility in cotton prices. After peaking in April, prices fell steadily to 96.7 cents per pound on December 30. Prices now look to have stabilised.

But with world cotton stocks rising for the third consecutive season, and long-term reluctance among spinners to switch back from cost-competitive man-made fibres, now may not be the right time to jump into cotton.

Source: http://www.thenational.ae/thenationalconversation/industry-insights/markets/heavy-supply-weak-demand-soften-cotton