Low crop yield in India amid global supply chain hurdles and soaring energy prices squeezed supply, which coupled with the post-pandemic rise in demand has boosted the price of the soft commodity.
After reaching a peak of $1.54 a pound in April, will cotton repeat the all-time high of $2 achieved in 2011? Here we take a closer look at the factors that may affect the cotton price forecast in 2022 and beyond.
Why did cotton prices surge in 2022?
As is the case with many agricultural commodities, weather is a key factor affecting production and shaping cotton price forecasts.
The most recent spike in the cotton price is largely associated with draughts in West Texas, the largest cotton-producing region in the US, the world’s third biggest cotton producer. Dry, hot weather affects the production of raw cotton, which in turn restricts supply.
The weather in India, however, was cooler and wetter. Favourable conditions in the region may counter the lower production in the US, according to the Price Group’s report on cotton.
Soaring energy prices and a commodity boom amid Russia’s invasion of Ukraine coupled with growing post-pandemic demand and supply chain constraints have been contributing factors to the price spike in 2022.
“Global cotton prices peaked as demand started to weaken amid the global economy slowing down due to rising risks, while higher volume of plantings, and better weather for the next cotton production season are expected to increase production,” a Fitch Solutions Country Risk & Industry Research report published on 16 June said.
China’s slowing imports weigh on cotton demand
Despite the surge in the price of cotton driven by supply and demand dynamics earlier this year, the soft commodity’s price is expected to take a hit in the near term. This is due to a string of headwinds that are expected to take a toll on the demand for the commodity, and hence affect cotton price forecast.
Lower demand from China, the world’s largest importer of cotton, in the 2021-2022 period is expected to drag prices lower. According to the United States Department of Agriculture (USDA), China’s 2021/22 imports were forecast to decline to 8.5 million bales, down over 4.3 million bales from a year ago.
“This downfall can be attributed to four main factors: massive earlier imports that remained in bonded warehouses at the start of the year, lower-than-expected consumption in China, a sudden change in the price differential between imports and domestic cotton, and lower demand from State-Trading Enterprises (STEs) relative to the previous year,” USDA said in a report.
Price Group’s futures market analyst Jack Scoville said that the pandemic’s effect in China had taken a toll on the country’s demand for US cotton.
“Chinese demand could become less due to the Covid lockdowns. There are trimming imports due to Covid and has closed a number of cities as the Covid spreads through the nation. The cities and ports are shut down again as Covid returns,” Scoville said.
The latest report by Fitch Solutions Country Risk & Industry Research published on 16 June indicated that the “US ban on Xinjiang cotton imports, set to be enforced from June 21, 2022, and scheduled to last for eight years or until there is a material change in the disputed issues, is unlikely to have a significant impact on the Chinese cotton industry.”
The ban had been placed on cotton products from China’s western Xinjiang region by the Donald Trump administration in January 2021 on grounds that they were made with the help of forced labour from detained Uighur Muslims.
High inflation takes a toll on consumption
Higher inflation around the world along with lower consumption, reflected in lower retail sales, may also drag the cotton price forecast lower.
Consumer prices in the US jumped by a multi-decade high of 8.6% in May from a year ago, owing to the higher prices of petrol, food and other necessities during the period. Meanwhile, retail sales fell at a seasonally adjusted rate of 0.3% month-on-month.
Monetary policy tightening by the US Federal Reserve (Fed) to tame inflation may have an impact on the spending habits of consumers.
Earlier this week, the US central bank raised its benchmark interest rate by 0.75 percentage points, which took the key rate to a range of 1.5% to 1.75%. Given this policy tightening, consumers are less likely to spend ahead, which could potentially affect the demand of cotton.
Cotton is primarily used in the textile and garment industry. Price fluctuations affect prices of the end products.
Cotton price forecast for 2022 and beyond
Fitch Solutions’ cotton price forecast for 2022 and 2023, published on 9 June 2022, suggested that the soft commodity’s price could plunge to 100 cents/lb and fall further to 90 cents/lb next year from its current 143 cents/lb.
Fitch didn’t provide a cotton price forecast for 2025.
According to the latest report by Fitch Solutions Country Risk & Industry Research, published on 16 June, cotton production in mainland China was expected to increase from 26.3m bales in 2021/22 to 27.1m in 2022/2023 – 2.98% year-on-year growth.
The projection, based on USDA forecasts, indicates a moderate increase in the planting area, reaching 3.03m hectares in 2022/2023 – a yearly growth of 1%.
The agency said that average yields were expected to benefit from a continued increase in Xinjiang planting relative to other producing regions.
The agency also expected more weakness in the second-month cotton futures on the Intercontinental Exchange over the coming months. Greater production from major producing nations such as India, the US, China, Pakistan and Brazil, eases the current market deficit.
Trading Economics’ cotton price predictions were bullish at the time of writing (16 June). The economics data provider suggested the price could average at $1.5211 in the third quarter (Q3) of 2022, rising to $1.5575 in Q4 and to $1.5949 in Q1 of 2023.
When looking for a cotton price forecast, it’s important to bear in mind that analysts’ price predictions can be wrong. Past performance of a commodity’s price is no guarantee of future results, which is why it is important to do your own research.
Your decision to buy or sell commodities should depend on your risk attitude, expertise in the market and the size of your portfolio. You should never invest or trade money you cannot afford to lose.