A “perfect storm” of events engulfed the cotton industry in 2010 and 2011 as retailers tried to dig out of the recessionary hole created for them when the U.S. economy tanked in 2007 and 2008.
Cotton prices did rebound but in a way that had profound influences on demand for cotton and for synthetic fibers that continues to have a negative impact on cotton prices today, according to J. Berrye Worsham, president and CEO of Cotton Incorporated.
“You had something happen in 2010 and 2011, a series of events that had never happened before and probably won’t occur again,” he said. “We had the U.S. basically selling out of the crop. We had the world turning to India for exports, and then India decided to put an export ban on their cotton.
“We had China importing a tremendous amount of cotton to build their reserves, and then the market panicked. Cotton was the last commodity to make a run up, and the speculators got involved and drove the price globally up to over $2 per pound. We had a difference in the price of cotton and the price of polyester in Asia that was higher than the price of cotton had ever been.”
When prices reached those levels, manufacturers and retailers began saying they had to substitute synthetic fibers for cotton, "and they were doing that in products where they never would have considered it before," said Worsham. "And even though prices have come back to a little more of a parity we're still facing a lot of issues relative to synthetics.
Currently, China, which spins about 30 percent of the world's cotton, is paying the equivalent of a 50-cent spread between synthetic fabrics and cotton. "The Chinese are subsidizing cotton production at roughly $1 per pound.
"This hurts cotton," he said. "It encourages too much production in China. It reduces the level of use of cotton in China. When mill use in China is not growing, they're not importing cotton. We're not exporting it to them. We're the largest exporter to China. Therefore, inventories back up and prices go down."
In the long term, China likely will have a policy change that will drive their internal price back to what market prices are, he says. "Then we can see a more normal sort of recovery in the markets for cotton."
For more on the cotton market outlook, visit http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter.