Recent strengthening of cotton prices should be sustainable, based on economic outlook and technical factors, but several issues still cause concern, says Wally Darnielle, president and CEO, Plains Cotton Cooperative in Lubbock.
Darnielle, addressing the Beltwide Cotton Conferences in New Orleans, said the technical signs look good. The low value of the dollar helps. He said commodity buyers also are coming back into the market, looking for an inflation hedge. “They are buying long to hold, not for short sale,” he said.
“March futures show a higher trend and more people are coming into the market to provide support for near-term futures.”
He said cotton remains relatively cheap compared to other commodities.
“These high prices may be sustainable if retailers manage inventories well. An additional $1 per garment should make no difference in demand. Adding a dollar to the price of a pair of jeans probably will not discourage a consumer from buying.”
He said textile mills see little reason for higher cotton prices. “The recession resulted in lower retail prices (for fabrics). A spike in oil and chemical prices also affects mill production costs. Many mills are losing money.”
But fiber supplies are low. “Many mills in Mexico and the United States have scant coverage for the first quarter of 2010,” Darnielle said. Many mill buyers have said they will not pay more for cotton than they did in 2009. They may have to.
“They will not be able to buy at last year’s prices. And there are still profits in the apparel segment. Mills are used to buying hand to mouth and they will have to buy soon. It is more expensive to shut down a mill than it is to pay more for cotton.”
Darnielle said demand for cotton will persist into 2010 as global population growth continues. Much of that demand takes place outside the United States in countries that “are less indebted.” He said some Asian countries have been hit less hard by the recession because “they tended to spend less and save more.” In those countries, apparel sales have not suffered as much as in the United States and Europe.
He said yields will continue to increase in the United States and other countries. “But so will consumption. Long-term, fiber demand will out-strip fiber supply.”
Interest rates, energy costs and fertilizer prices, he said, should remain flat. “Higher price of synthetics also favors cotton.”
Darnielle said lower U.S. and world carryover also supports higher prices. The size of the 2009 U.S. crop “has shrunk and China has had some crop setbacks. So have India and Pakistan. We would need an additional 10 million bales just to get back to where we were” in 2006 and 2007, he said. “We’re not likely to see that and not likely to see prices tank.”
He expects global production to increase by 5 million to 10 million acres in 2010 and 2011. The U.S. crop could be up 1.4 million. “There is not much more to add. Most of the arable land capable of producing cotton is already being farmed and food security issues may limit cotton acreage increases.”
He expressed concerns. Fewer cotton traders are available following loss of several established firms over the last few years.
“And the futures market is no longer a viable hedge for a physical product. Markets are determined by technical trades and have become a video game for the Twitter generation.”
He said supply and demand of the dollar has become more important than supply and demand of cotton.
He said that even though the global recession seems to be ending, unemployment will continue for some time. “Economic confidence also is a fragile thing,” he said, “and consumers could pull back into their shells.”
Fewer buyers are left to vie for cotton and Darnielle wonders if all of them are “committed to cotton.” He said the industry no longer has the tools it once had to hedge, buy, sell, store and deliver cotton.
He urged growers to read and understand any contracts they sign. “Know what you’re getting into with your market plan.”
Synthetic fibers, he said, always pose a threat.