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Tuesday, November 15, 2016

A quick situation report on the cotton market

By Andrew Woods  |  Source: ICAC, ABARES, CRB, Cotlook, CottonInc, PCI Wood MacKenzie

Key points

  • The cotton stocks to use ratio looks to have peaked.
  • Stocks to use peaked at around 93% of consumption.
  • The falling stocks to use ratio will help bolster cotton prices.
  • Continued high stock levels combined with a relatively high price ratio to polyester will limit upside for cotton prices.

2016-11-15 Cotton Fig 1

2016-11-15 Cotton Fig 2

2016-11-15 Cotton Fig 3

In 2010-11 apparel fibre prices rose to high levels, with cotton prices finally eclipsing the massive peak in price seen during the American civil war in the nineteenth century (known as the cotton famine amongst European processors at the time). During the aftermath, as prices fell, China accumulated a massive cotton stockpile. This article takes a look at the current stocks situation for cotton.

Figure 1 shows a cotton price series (Cotlook index) and the stocks to use ratio from the early 1980s through to 2016/17 (estimates).  The spike in price during 2010-11 stands out, as does the rise in stock levels following 2010-11. Stocks to use are broken into two parts, Chinese and the rest of the world. It is growth in the Chinese stocks that accounts for most of the rise in stock level post 2010-11.  In 2014-15 to 2015-16 stocks peaked at 93% of (mill) consumption, and have declined slightly. The good news is that stocks have peaked. The bad news is that stocks to use remains at 80%, which is nearly double the long term average level.

The price for 2016-17 is calculated by using an ICAC model, which derives the cotton price from a mix of supply and demand estimates. The 2016-17 price is projected to rise by 5.7%.

Figure 2 compares the year on year change in stocks to use level and price for cotton, form the early 1980s through to 2016-17. The drop in stocks to use levels helps explain the firmness in cotton prices. Recent revisions to consumption and stocks estimates for the past couple of years have painted a marginally improved picture for cotton. However with cotton stocks to use still at 80% it is hard to see cotton prices rising much beyond the ICAC model estimate.

ICAC (International Cotton Advisory Council) stated recently that polyester represents that greatest threat to cotton, with cheap polyester stealing market share from cotton. Figure 3 shows the price ratio for a Cotlook Index price series and a polyester staple price series, from the late 1980s onwards. The high price ratio shows why ICAC are so concerned about the predations of polyester on cotton’s market share. This is also another reason why cotton prices look to have limited upside.

What does this mean?

Falling stock levels should help support cotton prices but the continued high stocks to use level combined with a high price relative to polyester looks likely to cap cotton prices. It remains a multi-year project for the cotton industry to bring world stocks under control.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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