Last month, world cotton prices finally begin to show signs of easing. Spot prices are down 37 percent from peak levels touch in April 2022 with per lb price falling below $1 for the first time since October last year. Does the crash in the cotton market bode well for textile players, as it comes on the back of inventory building at decade-high prices?

Whether local textile value chain will benefit from the brakes pushed on price rally remains to be seen. On one hand, local industry has imported cotton at average unit price of $2.3 per kg in the past 12-months, which they may no longer be able to price into future export contracts as raw material prices come down crashing. On the other hand, global prices have crashed at the cusp of fresh local crop arrivals, which means inventory building for the following year can take place at weakest levels in over a year.

Meanwhile, global cotton futures are still trading well above $2.25 per kg, significantly higher than pre-pandemic levels (2019), when per kg price had remained rangebound under $2 per kg.Although world cotton output remained below pre-pandemic levels during 2021-22 season – at 25.3MMT, it is now forecast to reach 26.1MMT during the upcoming marketing year 2022-23, highest in 5 years. As consumer demand tanks given the risk of a global recession, cotton prices may come down a lot more in the months to come. But will they fall back to the pre-pandemic range?

Not necessarily. USDA projects that the ending stocks to use ratio for the upcoming 2022-23 season will remain unchanged at 70 percent, even as demand stutters. Although this may appear significantly lower than the pandemic year when the ratio climbed all the way up to 95 percent, it is still above pre-pandemic levels of 67 percent. World cotton prices had remained rangebound between $1.6 to $1.9 per kg between 2017 – 2019. Thus, past trend indicates that the global cotton inventory is yet to show signs of stress.

Does that mean that the relentless climb of world cotton prices over past year was pretty much transitory? Not exactly. The surge in world cotton prices has had to less to do with post-pandemic demand recovery, and more to do with Xinjiang cotton ban which has now come fully into force.

While the ban did help turn some orders away from China to smaller exporting countries such as Pakistan, it also helps explain why cotton prices were elevated even as global cotton stocks position remained adequate. In fact, ex- of Xinjiang cotton, ending stocks to use ratio would fall from 70 percent to mid-60s, which is the lowest since 2010-11.

Which raises the distinct possibility that even as global textile demand tumbles, world cotton prices may be slower to return to pre-pandemic territory of $1.5 to $1.75 per kg (or may never see that range again at all). FY23 may very well witness export volumes decline as world textile demand weans off of the post-lockdown consumption binge. However, export unit prices may sustain for slightly longer.