Cotton prices for major markets were trading at their multi-year peaks almost two months ago when the global economy was looking at a robust recovery post COVID-19 and clothing demand in all major economies was very certain to grow beyond pre-pandemic levels. Although, the current prices are also much higher than historical levels, they have virtually flattened out over the last two months, despite macroeconomic conditions that hint at a commodity run never seen historically.

Figure 1: Cotton fibre prices across major regions (relative to beginning of 2021)

Cotton prices saw the largest jump in the later months of 2021, due primarily to supply chain bottlenecks and lagging supply in the market. Festive demand also contributed to pushing up the prices. Resultantly, cotton prices currently tread at almost 50 per cent higher than last year, and they have stagnated at those levels over the past month.

USDA in its world cotton market updates for February 2022 and January 2022 mentioned strong global demand and lower supplies due to logistical challenges, which led to prices rising consistently until the middle of February 2022. Over the month of January 2022, Cotlook-A index rose by 10.1 per cent, while cotton prices in Brazil rose the most by 16.1 per cent. China’s cotton prices (3128B) rose slightly by 2.2 per cent as demand for cotton from countries other than China perhaps grew much more.

Figure 2: Cotton fibre prices across major regions (YTD 2022)

By the middle of February 2022, several global agencies were expecting heightened tensions between Russia and Ukraine, and the possibility of the current situation was fairly high. Evidently, prices of all major commodities perked up amidst a rush to hoard these commodities before supply chains get disrupted further. Even in such a scenario, cotton prices remained flat, and they even declined slightly recently in major markets. There are several reasons for the seeming anomaly, involving both supply and demand factors. In the US at least, cotton produce was expected to be much higher this year than last year, building expectations of lower prices and keeping current demand muted. Additionally, apparel demand may have also been disrupted due to the Russia-Ukraine conflict, or apparel producers may perhaps be switching to use synthetic fibres as prices in that market have remained relatively muted.

The NCC (National Cotton Council) Survey of Cotton Producers in the US estimated a 7.1 per cent increase in output of upland cotton and a 24.8 per cent increase in extra-long staple (ELS) cotton in 2022 compared to 2021.1 An expected increase in crop output would generally convert into expectations of lower prices, and therefore current growth in prices also tepid. Cotton prices in Brazil also grew at a weak 4.6 per cent in February 2022, as demand uncertainty grew, and expectations of a much higher produce in 2022.2 Domestic cotton output in China as well as sales of cotton saw slow growth compared to previous year in late February and early March, as per surveys by the National Cotton Market Monitoring System.3

Figure 3: Cotton prices for Domestic India – Shankar 6 (INR/Candy)

However, the scenario in the Indian market was slightly different. Cotton prices in the domestic market traded higher in the last two months, due to expected supply shortages, and increasing costs. However, prices stabilised in the second fortnight of February 2022 as demand for cotton yarn was muted. Recently cotton buying has picked up again, pushing prices up sharply further.

Interestingly, expectations of higher cotton produce from the NCC survey in the US are implied because of expected higher sowing of cotton crop. While deciding on how much to produce, farmers take cue from expected prices and demand in the near future, as well as the cost of production. The prices were still rising when the survey in US was undertaken. The expectations and choices of how much to grow with farmers may change as price and demand expectations get revised. As of now, it is hard to speak of how much demand for apparel across the world has been impacted due to the Russia-Ukraine conflict. Exports from China and other major apparel producing countries have stalled as major shipping companies banned orders to and from Russia. To that extent, apparel demand may likely be down by almost $1-2 billion or more depending on how long the conflict continues and what other trade channels may have possibly been disturbed.

Even when we are sure that demand will likely be impacted further due to trade disruptions, cost factors are expected to impact the decision of how much cotton to produce directly through energy use. The other route is through use of alternative fibres in yarn production, mostly notably synthetic fibres, which are still reasonably priced relative to historical trends. As mentioned above, cotton produce will probably be adjusted by farmers keeping in mind both cost and expectations for future prices.

So, partially all the above factors have been at play to keep cotton prices stagnant at current levels. Overall trade disruptions to Russia, and other countries from Asia is perhaps the most prominent cause of uncertainty. The weekly update for the cotton market by Gujarat Cotton Association (week ended March 12, 2022) highlights that Russia-Ukraine conflict remained the key concern in the market, and thereby, yarn market remained dull. In addition to this, even when PSF prices have perked up due to record high crude oil prices in the market, they appear attractive historically. For instance, Cotlook-A prices are almost 63 per cent higher than the 10-yr average. On the other hand, current PSF prices are nowhere close to its 2018 peak. Therefore, a combination of these factors may contribute even further to continue the uncertainty in the market and keep prices muted going forward.

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