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According to World Bank’s commodity markets outlook, global cotton prices continued their upward rally in July 2021, reaching its highest level in at least 9 years. Cotton ‘A’ index breached $2.15 per kg during the month and has since stayed in the territory. Cotton prices have rallied since the great commodity crash of April last year, rising by 55 percent since their bottom over the past 16 months. In fact, cotton prices are already 30 percent higher than their pre-pandemic levels. This is one of the highest rises within agricultural commodities, outside of maize and edible oil crops.

It appears that the commodity analyst’s community is divided over how long the cotton price bonanza may last. While many have been quick to ascribe the broad-based rise in various commodity prices to global supply chain disruptions, it now seems that the great cotton rise has taken on more solid roots. USDA projects global cotton consumption for marketing year 2021-22 at nearly 27 million metric tons, highest since at least 2007-08. At that time, the global financial crisis that hit world markets in September 2008 quickly tampered commodity demand, bringing down world consumption precipitously by over 11 percent within a year. Most indicators suggest that a similar correction may not be on the cards for the foreseeable future this time around.

First, world cotton consumption has already been on the rise throughout Covid year, as 2020-21 witnessed a 15 percent rise in consumption led by quicker than expected re-opening of industrial base in China and efforts by various governments across the developing world to prop up export base, benefiting textile exporting companies. Moreover, national commodity procurement operations program continued unabated in major cotton producing regions such as India and China, as governments not only sought to top up strategic reserves during uncertain times but also used the procurement operations to roll out support to farming communities (India).

Meanwhile, uncertain demand outlook during peak sowing period (Feb-Jul 2020) across many regions led to reduction in area under cultivation, leading to fall in output by as much as 25 percent in major exporting countries such as USA and Brazil. This was further compounded by shortfalls in other regions such as Australia and Pakistan, where extreme weather events (drought and monsoon rains, respectively) damaged yield.

Furthermore, the passing of Uyghur Forced Labour Prevention Act by US Senate last month is expected to shift demand for cotton and cotton-based products to other textile exporting nations. While this may benefit competing yarn and garment producing regions such as Vietnam, Bangladesh, Turkey, and Pakistan, it has also increased pressure on commodity prices as world tradable surplus of cotton has diminished.

In recent years, the exportable surplus generated by Brazil and USA alone has been (theoretically) sufficient to meet combined import demand from top 5 importing nations: Bangladesh, Vietnam, Pakistan, Turkey, and India (excluding China). This is no longer the case. Meanwhile, Chinese yarn and garment exporters have also entered the fray, as they compete to procure non-Xinjiang based cotton to stay afloat in world textile global and regional value chains.

Thus, even as world demand touches its highest level in 13+ years, tradable cotton is short in supply, even as there is no shortage of willing buyers at ever-higher prices. Nothing short of dramatic rise in output in top three exporting countries – USA, Brazil, and India – may save the day. Unless of course China begins to offload its strategic reserve in world market just as it did in 2011. But that appears out of question at the moment.

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