The laws of supply and demand have traditionally have been the driver for cotton prices. But over the last few years, factors like liquidity injections, banking crises and world economic troubles have pushed prices into trading ranges far beyond what fundamentals would suggest, noted Antonio Esteve, president of the International Cotton Association, Sao Paulo, Brazil. Esteve participated in an outlook symposium at the 2012 Beltwide Cotton Conferences in Orlando, Fla.
Esteve says the process of cotton price discovery “is very much being impacted by this macro-economy. Through this framework, we are living through very volatile times, and I donΆt believe this will be going away that soon.”
Cotton began to feel the impacts of outside dynamics in 2007-08 and continues to feel them today, Esteve said. “In 2007-08, after the subprime crisis, we had massive injections of liquidity move into the markets. We saw oil go to $150 a barrel, the Dow Jones to 14,000 and soybean prices to $16 a bushel.”
While the massive liquidity affected cotton prices significantly that marketing year, “there was no shortage of cotton,” Esteve said. “The macro-economy superseded cotton fundamentals that year. We had plenty of cotton, so much that prices went back to 50 cents by November of that year.”
Cotton prices again ran up in 2010-11, but this time, fundamentals, and some panic on the part of end users, were behind the move, according to Esteve. “Cotton acreage had declined and we used up all our excess stocks. When we got to the beginning of the 2010-11 year, even China had consumed most of its reserve stocks. We started the year with no cushion, and when there were crop problems, the market panicked. Even the retailers panicked. It created an artificial situation where the demand seemed a lot bigger than it really was.
“It was fundamentally driven rather than monetarily driven. But by running prices up too high, we over-rationed consumption and in the end, we had an increase in stocks for the year.
“To make it worse, we stimulated production so that we now have a tremendous world surplus projected for 2011-12. Looking at it from a stocks-to-use ratio, before the panic, the stocks-to-use ratio was approaching 32 percent, and afterwards it went up to 41 percent, which caused a rapid decline in prices.”
World cotton production appears to be on pace for another big year in 2012, between 121 million and 124 million bales, but world consumption estimates range only between 104 million and 111 million. The 7 million bale range “is a huge difference,” Esteve said.
Esteve estimates cotton consumption in 2012-13 at around 106.5 million bales, based on the bleak economic outlook and perhaps some residual pain from high prices. “WeΆre not sure how much market share we lost last year. Traditionally, we would expect to lose 3 percent to 5 percent. We think we may have lost more than that. We believe that once you lose that market share, itΆs very hard to gain it back very quickly.”
After panicking and overbuying in 2010-11, textile mills will likely return to hand-to-mouth buying in 2012, Esteve said. “They are going to be very cautious. They are not going to chase the market higher. We donΆt see a repeat of last year on the cotton demand side.”
ChinaΆs role
Esteve believes ChinaΆs role in cotton production will continue to drive prices. “They produce over 30 percent of the worldΆs cotton, spin 40 percent of the worldΆs cotton and they buy 40 percent of the worldΆs imports. What China is doing with its reserve buying will have a major impact. They have bought close to a million tons (4 million bales) of imported cotton and they are buying cotton at a clip of 70,000 to 80,000 tons daily.
“Today, we estimate that China will put 4 million to 4.5 million tons (16 million to 18 million bales) into its reserve. Tomorrow it could be more. The million dollar question is how much of this cotton will they hold back, how much they will sell back into the market and under what policy and price level. They can create an artificial shortage in the market. So we could have prices go up in spite of the shortage. But what happens in 2012-13? Will China continue to restock and absorb excess supply? ItΆs possible, but I donΆt think itΆs probable.”
If cotton production continues to be strong as it is today, and consumption continues to weaken, another 3 million bales could be added to the world supply surplus, Esteve said. “World stocks would go to 73 million bales. ThatΆs a tremendous stocks-to-use ratio. At some point, the market is going to have to buy consumption. Prices will have to do that job.”
Esteve sees a 35-cent cotton price range for December 2012 futures, between 72.5 cents to $107.50.
ChinaΆs buying of stocks could present a hedging opportunity for producers to price cotton at up to a dollar, he says. “I donΆt see prices taking off beyond that. Obviously you could have some crop problems, and prices could take off. ItΆs hard to predict.
“Just remember that these dynamics are changing all the time. Things could be different a month from now. Nothing is static. Once you think you have it figured out, you get blindsided by something you couldnΆt foresee.”
In answer to a question on the prospects for recovery in the world economy, Terry Townsend, executive director of the International Cotton Advisory Committee, said, “We do not expect a double-dip recession, although we acknowledge that it could happen. We think that by 2012-13, the world economy and mill use will be back into a stable trend.”
