Cotton outlook: rangebound?

The October report card brings tense news for cotton watchers. Despite a dramatic rise in local production – where domestic cotton output is forecast to increase by as much as two-thirds over the previous season – world prices are once again rangebound above 85 cents per lb, albeit with greater upside beta than downside.

Those with some context and a sense of history know that prices are flirting with the higher end, as domestic industry may struggle to maintain competitiveness if prices keep edging up. Cotton prices above 100 cents per lb do not bode well for raw material deficit textile exporters such as Pakistan, as experienced during the last fiscal year when higher cotton prices overlapped with a depreciating exchange rate and rationing of foreign currency, leading to a shortfall of imported cotton and very tight ending stock position for the local spinning industry.

Although the bumper cotton crop is great news, Pakistan could still fall short by 5 million bales (of 170kg) from its historic domestic use of 14 million bales, which means continued significant reliance on imported cotton. Consider that for several years now, Pakistan is the second largest imported of US origin cotton, with imports averaging above 1 million bales from the Northern American shores. However, even as Pakistan has increased its local production by at least 2.5 million bales, US production is now forecast to decline by nearly the same volume during the same period. However, lower US production may still not be the greatest worry.

China, which is the largest importer of US origin cotton, may also see it local output decline by a whopping 5 million bales (of 170kg) during the current marketing season, meaning there is not only less cotton to go around, but there are also hungrier buyers out of China looking to lap up whatever’s available. Meanwhile, producing regions across the globe from Turkey to India have witnessed weather snafus, with output forecast lowered compared to last year by a margin.

Which, put together means that after witnessing 150 million bales of record global production during the last marketing season, world cotton output is once again on a decline, possibly by as much as 6 million bales (of 170kg). And while Pakistani spinning houses may last a while on the initial exuberance of domestic bumper crop, it wouldn’t be long before the reality hits home and the expensive imports consignments begin to trickle in. How will the industry manage to maintain competitiveness if world prices go haywire because of any further weather-related complication to global output remains a serious question, especially as it has remained unable to resolve the perpetual affordable energy question so far.

Textile industry’s problems might not just yet after all.