Good weather is bad: Cotton prices tumble as U.S. producers expect bumper crop


U.S. cotton producers, it would seem, just can’t stand prosperity.

I just read through the economic outlook inthe most recent newsletter from the Memphis-based Cotton Board in which Jon Devine, a senior economist with Cotton Inc., does a good job of explaining the current outlook for cotton prices going forward. It’s not so pretty.

Cotton prices are currently tanking, with December futures trading at something close to five-year lows. The short explanation for this is just Economics 101: investors are expecting a huge supply that will almost certainly outpace demand for the fiber in the coming year.

The reasons behind the unbalanced supply/demand scenario are slightly more complicated, of course.

But it goes something like this: For the past few years China — the world’s biggest cotton importer — has been supporting cotton prices because it has been stockpiling vast reserves of the fiber. Meanwhile the U.S. — the world’s biggest cotton exporter — has seen its production limited during this same period due in large part to the severe drought in Texas and the Midwest (but mainly Texas).

Well, this year the Chinese have decided they may have stockpiled just about all the cotton they need. Anytime your biggest customer dials back buying it’s bad, but making matters worse this year is that it finally started raining in West Texas.

Buoyed by good weather, U.S. growers are expected to produce millions more bales of the fluffy white stuff this year — just in time for the Chinese to say “No thanks; we’re good.”

The result is December cotton futures trading at 65 cents per pound, with some reports saying that 50 cents is a real possibility. To put the price drop into perspective, at about this time last year prices for December cotton were hovering around 90 cents per pound.

Anyone selling a product that loses almost a third of its value so quickly is probably going to be in for a tough year, and that’s what U.S. growers — and investors — are facing in 2014.

If there is a silver lining to the current scenario, Devine says, it’s that the lower prices for cotton could make the fiber more competitive with lower-priced synthetic fiber.

“In the past few years it has been tough for cotton, price-wise, compared to polyester,” he says. “Maybe when we do see the prices decrease in the coming year, that will encourage mills to move back to cotton.”