The recent rise in cotton prices may have some wondering if there might be a repeat of the historic price rise during the 2010/2011 crop year, during which raw cotton prices escalated well above $2.00 per pound. With near-record global supply, history is not likely to repeat itself in this regard.

The current rise may be attributed to several factors, including seasonality, a unique situation relative to India and Pakistan, as well as certain details related to sales from the Chinese reserve program.

Some of the recent movement in cotton prices can likely be traced to Pakistan and India.

Last year, growers in Pakistan had a challenging season due to weather and pest issues that pulled yields 30 percent lower. With less cotton available domestically, Pakistani mills had to import cotton and actually imported their second-highest volume on record (up 2.2 million bales year-over-year).

It is important to note that most of Pakistan’s imports come from India, and it appears that Indian shippers may have been too aggressive, too early.

There have been reports that India has had to re-import cotton back from Pakistan. According to recent trade data for March-May, India imported 44 percent more cotton from all sources over those three months than the year before.

India has traditionally been a source of cotton to the world, but the fact that the country has had to instead pull cotton from the rest of the world has likely had an effect on cotton prices elsewhere. The magnitude of the price increases in India has been dramatic, with values climbing from the mid-60s a couple of months ago to around 90 cents/lb more recently.

China remains a separate market because of import restrictions, but there have also been increases in cotton prices in China due to tightness in supply.

As has been the case in recent years, price movement can be associated with government action. In this case, ironically, the increases over the past couple months were concurrent with releases from the governmentΆs reserve program. The auctions have been successful, with virtually all the cotton (domestic and foreign) offered for sale being sold. In previous rounds of sales, uptake has been around 5 percent; this time it has been near 100 percent.

With sales from reserves representing a new source of supply for the Chinese market, the issue of scarcity in China is a little complicated.

One reason supplies have been tight is that Chinese mills were anticipating the government would sell cotton at lower prices this spring. Because of that, mills didnΆt want to be holding more expensive fiber before sales began and most mills entered the auction period with little inventory. This explains why virtually all of the cotton offered for sale has been purchased.

As auctions progressed, there were logistical issues associated with fiber quality that caused the volume of cotton offered for sale to fall by about a third in late May and early June. In July, volumes moved back up to 30,000 tons/day. This meant that mills were not able to get the supplies they might have been expecting from the auctions. In addition, Chinese traders have been siphoning off a significant proportion of auctioned cotton (between 30 percent and 50 percent). Reports suggest that these traders have been taking speculative positions by sitting on what they buy.

By withholding supply, these traders contributed to scarcity and likely helped prices rise.

In response to the tight supply situation, the Chinese government recently extended its auction period for another month (now through the end of September). By signaling the availability of more cotton, this has already helped Chinese prices to turn lower. Since the end of July, Chinese prices have fallen 4-5 cents/lb.

Both in and out of China, cotton prices could be expected to decrease for a number of reasons.

First, a similar pattern of cotton price movement occurred last year. In the summer, supply can be tighter because itΆs the time when warehoused supplies are relied upon. As the harvest begins, new supply becomes available and prices can ease. For the upcoming harvest, it doesnΆt look like there will be any crop failures like the one suffered in Pakistan last fall. A larger Pakistani crop will erase a couple million bales of import demand from the global market, which can lead to increases in stocks in exporting countries and therefore put downward pressure on prices everywhere.

One country where the increase in stocks could be significant is the U.S.

U.S. cotton acreage increased 20 percent this year. There is some dryness in West Texas, but the crop got off to a good start and expectations are that the harvest could be 23 percent larger (+2.9 million bales) than a year ago.

One major question, however, is where will all of that cotton go?

China is expected to hold to its quota restrictions, and with the rebound in production in Pakistan, growth in exports to most other importing countries can be expected to be only a few hundred thousand bales here and there. The U.S. could end up with a large increase in stocks with the 2016/17 crop year. Since the U.S. is the worldΆs largest exporting country, stocks build and the extent to which price pressures are felt in the U.S. should have implications for prices internationally.

Moving forward, some key indicators to watch:

Pakistani and Indian crop developments

The outlook for Pakistani crop is positive. India should have lower acreage but improved yields can offset lower planted area. India should also have significantly lower exports if Pakistan has a decent harvest.

U.S. weather and exports

There have been dry conditions in the key West Texas growing region, but the crop got off to a good start and there has been some rainfall recently. Production figures for the U.S. relative to export expectations will be important for prices as we move into the fall and winter.

Chinese Imports

China has indicated that it might bring in some quality cotton from abroad to lift the average quantity held in reserves. If this occurs, it would not likely be a lot of cotton, but it could boost prices if/when it happens.

By Jon Devine, senior economist, Cotton Incorporated