The price of cotton is breaking new records to the upside, and mills in China and other Asian countries are struggling to meet supply needs. In Northern and Western Texas, cotton farmers have abandoned agreements to mills and traders. During the planting season in 2010, cotton traded around eighty cents a pound. The cotton market looks differently in the first quarter 2011, as cotton traded over a dollar higher than the previous year. It remains to be seen if African producers stand to benefit from the volatility in the cotton markets.
The March 2011 futures contract traded as low as 68 cents in February 2010. At that time, farmers in Texas signed to deliver cotton at a price below a dollar for 2010 and 2011. Then the fundamentals changed due to a poor weather in India, the second largest producer, and demand from China, the world's largest producer. On Friday February 18th, the last trading before first notice day, cotton traded lock limit up to as high as $2.11, the highest price on record, before closing down lock limit at $1.97.
The recent surge in the price of cotton has caused farmers in Northern and Western Texas, in particular in the area around Lubbock, to rethink about contracts agreed to in 2010 to supply for delivery at the end of 2010 and 2011. Some farmers in Texas have abandoned forward contracts and are trying to re-negotiate the prices agreed to a year earlier.
The cotton market is facing a supply squeeze. This predicament was precipitated by farmers in Texas walking away from previous commitments and pledges. Traders are scouting for cotton outside the cotton belt of the US.
Sub-Saharan Africa is emerging as the principal supplier to traders, mills and manufacturers in China, Bangladesh, Turkey, Indonesia, Thailand and Korea. Burkina Faso, for example, exported about 830,000 bales of cotton in 2010. Each bale weighs 480 pounds.
Other than Ghana, Guinea and a few others, most sub-Saharan countries produce cotton for export. Ghana produces only 23,000 bales, and Guinea produces a paltry 14,000 bales. However, Zimbabwe, Mali, Nigeria, Ivory Coast, Benin, Cameroon, Tanzania and others are exporters. These countries individually export over 200,000 bales and hold the solution to the world's demand and supply equations for cotton.
Zimbabwe and Mali exported over 420,000 bales each and have the capability to expand acreage and increase production. Ivory Coast, Benin, Cameroon and Nigeria also have the potential to boost cotton production to meet demand on the world market. Cotton could emerge as key commodity for Africa countries looking to diversify exports away from crude oil. After taking a hit when oil prices collapsed in 2008 and 2009, Nigeria, Cameroon and Ivory Coast are diversifying their sources of export revenue.
Before the oil boom, in sub-Saharan Africa, most countries in the region concentrated on cultivating cash crops like cocoa and coffee. Other sources of export revenues were metals like gold, copper etc. Sub-Saharan African never looked at food grains like corn and rice or fibers like cotton as wealth boosters until recently.
In the US, acreage for cotton is under an onslaught as farmers increase acreage for corn and beans at the expense of acreage for fibers like cotton. The US will have lesser amount of cotton for export this year than last year, and African countries could step in and pick up the slack. Burkina Faso, the biggest exporter from Africa, is emerging as a major player on the world market and is the seventh in the world. Ghana, with a miniscule of 23,000 bale production, could learn from Burkina and boost acreage for cotton in the three northern regions. Cotton is one strategic commodity which could uplift incomes in the poorest sectors of Ghana's extreme north.
The author, Kofi Amoabin, is a consultant on commodities trading and the energy markets. Previously, Mr. Amoabin served as CEO of Chicago Futures Investment Group, Inc.
