Volatility will continue to rule the cotton market in 2023 with China remaining the dominant force when it comes to demand.

Speaking at the annual meeting of Southern Cotton Growers/Southeastern Cotton Ginners at the Marriott Myrtle Beach Grand Dunes in Myrtle Beach, S.C., Cotton Incorporated Senior Economist Jon Devine said volatility in prices, volatility in supply and demand, and uncertainty about choppy business conditions in each stage of the supply will impact the market.

Market watchers are expecting less cotton acreage across the United States in 2023 due to better prospects expected for competing crops. An informal straw poll of cotton farmers taken during the afternoon producer session of the conference shows cotton acreage will likely decrease by at least 10% across the Southeast this year.

Devine said one key factor in the cotton market is spinners are in a tough spot because they are still taking in shipments of expensive fiber but are selling yarn in a softer market.

“Spinners tend to make more money, counterintuitively, when fiber prices are rising. That’s because they are rolling inventory. They are getting shipments of cotton that they bought at cheaper prices, and they are selling it to a yarn market reflective of those higher prices. Conversely, when cotton prices decrease, they are taking shipments of higher priced cotton even though yarn prices have moved on,” Devine explained.

Devine pointed out that price volatility is impacting the profitability of mills across China. Citing November data, Devine said the latest shipments of cotton coming into China are valued at $1.30 per pound while at the same time, domestic Chinese cotton prices were below $1 pound. Devin said this means the Chinese are taking a 30 cents per pound loss while trying to sell to a yarn market based on current cash prices.

“This is a negative profit situation for mills in China,” Devine said.

For the U.S., November data shows that the average export price for U.S. cotton was over $1.10 per pound, which means dollar-plus cotton was still going to mills, even though international cotton prices are well below $1 now.

“The implication is mills are taking a hit on any cotton that’s getting shipped to them right now. We need for price direction to start to change. We need for these shipments to clear so that the balance sheets at the mill level can improve and demand can get a little bit better,” Devine said.

Devine said China traditionally is the biggest importer of cotton around the world and has been the biggest buyer of U.S. cotton in recent years. Last crop year, China bought about a third of all U.S. cotton.

“On top of that, there’s implications for our second largest customer. Vietnam is our number two client. Something that is important relative to the Vietnamese market is that about half of all of the cotton that they spin is exported to China,” Devine said.

Devine explained that after the previous spike in cotton prices, the Chinese government set a very high guaranteed price for cotton. “World markets moved lower, but the Chinese government, in enforcing that price guarantee, had an import quota preventing foreign cotton coming in to dilute that price guarantee. One way around that was to import yarn instead of fiber, so we saw a lot of Chinese companies open up spinning operations in Vietnam.”