When the global economy was looking at a robust recovery after COVID-19 and clothing demand in all major economies was very certain to grow beyond pre-pandemic levels, cotton prices for major markets were trading at their multi-year peaks almost two months ago. This was when cotton prices were trading at their highest levels in almost two years. Despite the fact that macroeconomic conditions have been pointing to a commodity run that has never been seen before in history, current prices have essentially levelled off over the past two months. This is despite the fact that current prices are also substantially higher than historical levels.
Cotton prices experienced the greatest increase in the latter months of 2021, mostly as a result of bottlenecks in the supply chain and a decrease in the available supply on the market. In addition, demand throughout the holiday season helped to drive up prices. As a direct consequence of this, the price of cotton is about fifty percent higher than it was this time last year, and it has remained unchanged at its current level for the past month.
The United States Department of Agriculture (USDA) cited robust worldwide demand and decreased supplies as a result of logistical issues in its updates on the world cotton market for February 2022 and January 2022. These factors led to prices climbing regularly until the middle of February 2022. In the month of January 2022, the Cotlook-A index increased by 10.1 percent, while cotton prices in Brazil increased by 16.1 percent, making Brazil the country where cotton prices increased the most. Cotton prices in China (3128B) increased little by 2.2% as demand for cotton maybe increased far more in countries other than China.
By the middle of February 2022, numerous international organisations anticipated an escalation of hostilities between Russia and Ukraine, and the likelihood of the situation as it is now was seen to be very high. It is clear that the prices of all main commodities have increased as a result of a rush to stockpile these items in anticipation of additional disruptions to supply systems. Cotton prices have been rather stable over the past few months, and in some of the most important markets, they have even slightly decreased. There are a number of factors, including supply and demand considerations, that contribute to the seeming abnormality in the market. At least in the United States, it was anticipated that cotton production would be significantly higher this year compared to the previous year. This led to the anticipation of lower prices and maintained a moderate level of present demand. Additionally, there is a possibility that the conflict between Russia and Ukraine has had an adverse effect on the demand for clothing, or that manufacturers of clothing have begun to shift their focus to the use of synthetic fibres because prices in that sector have remained relatively stable.
According to a survey conducted by the National Cotton Council (NCC) of cotton producers in the United States, the amount of upland cotton produced will increase by 7.1% in 2022 compared to 2021, while the amount of extra-long staple (ELS) cotton produced will increase by 24.8%.
1 In most cases, an anticipated increase in crop yield would result in an anticipation of reduced prices, which would cause the existing gain in prices to be somewhat muted. Cotton prices in Brazil also increased, but only by a meagre 4.6% in February 2022. This was due to the growing uncertainty surrounding demand as well as the anticipation of a significantly larger supply in 2022. 2 According to surveys conducted by the National Cotton Market Monitoring System in late February and early March, domestic cotton production in China as well as sales of cotton had sluggish growth in comparison to the same time period the previous year. 3
On the other hand, things played out a little bit differently in the Indian market. Because of anticipated constraints in supply and rising production expenses, cotton prices on the domestic market have been trading at higher levels during the past two months. However, as a result of a decrease in the amount of cotton yarn that was purchased during the second half of February 2022, prices levelled down. Cotton purchasing activity has just ramped up again, which has drastically pushed up prices even further.
It is interesting to note that the NCC poll in the US implies that there are expectations of a larger cotton produce since there are expectations of a bigger sowing of cotton crop. Farmers base their decisions on the anticipated pricing and levels of demand in the near future, in addition to the overall cost of production, when determining how much to produce. When the poll was carried out in the US, the costs had not yet stopped increasing. As farmers’ expectations regarding pricing and demand are updated, there is a possibility that their expectations and choices regarding how much to grow will shift. As of right now, it is difficult to say to what extent the crisis between Russia and Ukraine has had an impact on the level of demand for garments all over the world. As a result of major shipping companies banning orders to and from Russia, exports of clothes from key producing countries like China and other countries have ground to a halt. In light of this, it is possible that the demand for clothing will decrease by almost $1–2 billion, or perhaps more, depending on how long the conflict lasts and what other trade channels may have been disrupted as a result of the conflict.
Even though we are certain that disruptions to trade will likely have a further impact on demand, cost factors are expected to have an impact on the decision of how much cotton to produce directly through energy consumption. This is the case even when we are sure that demand will likely be further impacted. The third method involves the utilisation of alternative fibres in the manufacturing of yarn, most notably synthetic fibres, which still have prices that are competitive in comparison to historical tendencies. As was previously indicated, farmers would most likely change their cotton production while keeping in mind both the current cost and their forecasts for the future prices of cotton.
To some extent, then, each of the aforementioned elements has played a role in maintaining the status quo of the cotton market’s prices. The general disruption of trade routes leading to Russia and other countries in Asia is perhaps the most important factor contributing to the current state of unpredictability. According to the weekly update for the cotton market that was provided by the Gujarat Cotton Association (week that concluded on March 12, 2022), the conflict between Russia and Ukraine continued to be the primary issue in the market; as a result, the yarn market continued to be uninteresting. In addition to this, even though prices of PSF have increased as a result of record highs in the price of crude oil on the market, they still look to be attractive historically. For instance, when compared to the average price over the past 10 years, Cotlook-A costs are over 63% higher. On the other hand, current PSF prices are not even close to what they were in 2018, when they reached their highest point. As a consequence of this, it is possible that a combination of these factors may contribute even further to perpetuate the uncertainty in the market and to keep prices muted moving forward.