Cotton has been trading in a narrow range for two years, and it’s not likely to break out until ChinaΆs massive supplies are sold off.
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Cotton has been trading in a narrow range of 60 cents to 65 cents a pound for most of the past two years. DonΆt expect it to break out anytime soon.
ChinaΆs massive cotton stockpiles, dating from the aftermath of the financial crisis, are helping to keep prices from rising. At the end of last year, China was sitting on strategic reserves of more than 11 million tons of cotton, according to the China Cotton Association—an amount equivalent to half of the worldΆs annual production. China plans to sell about 20% of its total reserves this year, putting even more pressure on the market.
Yet few expect prices to fall much further. Globally, cotton production is expected to drop 17% in the current marketing year to its lowest level in more than a decade, according to the Agriculture Department. In the U.S., many cotton farmers have switched to growing soybeans and corn, which cost less to produce than cotton and command higher prices. Cotton closed at 64 cents a pound on Friday on the ICE Futures U.S. exchange.
“YouΆve got a cap over it, which is the fear of unlimited selling from China, and youΆve got a floor under, which is the approximate cost of production,” says Jerry Marshall, the owner of Yiyang Company, a Memphis-based cotton merchant that acts as a middleman between producers and mills. “The world stock outside China isnΆt very large. Prices outside China canΆt go down very much.”
For now, many cotton merchants have been trading less, while hedge funds that invest in commodities are taking up some of the slack. “The player pool has thinned,” says Louis Barbera, a New York–based broker at ICAP Cotton. Cotton merchants and traders expect the range-bound trading to continue until China works off its overhang, which could take years.
Some market participants are hopeful now that China is finally addressing the problem. “ItΆs paving the way for the market to get back to being able to trend fully,” Barbera says, adding that any weather-related supply disruptions could cause China to run down its stocks more quickly.
The lack of price volatility, which has frustrated many market participants, follows the extraordinary price swings in the cotton market between 2010 and 2011. Prices hit $2 a pound in 2011 as a series of weather events affected supplies, and China began to build up its reserves. Higher prices led to increased supplies and hampered demand, as many apparel makers replaced cotton with synthetic fibers, such as polyester.
Cotton prices soon plunged, dropping further in 2014 when China stopped stockpiling the fiber. Since the recession, total fiber consumption in the world has soared, but cotton consumption has stayed basically flat.
“I didnΆt realize what extreme price volatility would do to a commodity,” says Jordan Lea, chairman of Eastern Trading Company, a Greenville, S.C.–based cotton dealer. “ItΆs the most difficult market environment I can recall in 27 years” as a merchant.
CAROLYN CUI is an emerging markets reporter at The Wall Street Journal.
