The debate about cotton prices is missing the killer
OK, the contrast between broker forecasts is of more than
academics interest. Rabobank, for instance, said on Thursday it believes New York
futures are in for a firm finish to the year, ending at 85.0 cents a pound.
On Friday, Commonwealth Bank of Australia took a more
downbeat view, seeing them ended 2013 at 70 cents a pound. CBA cited "burdensome"
stockpiles, which are set to end 2012-13 at the equivalent of some nine months
supplies – a record high.
A gap of $0.15 a pound represents quite some value when the world is
expected to have more than 39bn pounds of cotton on tap even before getting to
this year's harvests.
But the real issue is why cotton prices are anywhere near
these levels at all.
The record levels of supplies imply that prices should be at
historic lows, meaning perhaps below 40 cents a pound, as last reached in late 2008.
The reasons they have remained well above this level are not
One good reason for cotton prices not to revisit past lows is
that production costs have risen.
Variable costs for US producers are some $543.42 per acre,
according to North Carolina State University. That is some 18% above 2008 levels.
Agricultural commodities tend to be supported, in times of
glut, at levels where it becomes more economic for farmers in major producing
countries to go on holiday than keep on growing.
In sugar, traders cite growing costs of production in
Brazil, pegged by Rabobank at close to 20 cents a pound for many mills, as one
reason why prices of the sweetener have not fallen back below 18 cents a pound
despite increasing ideas of the world production surplus.
But some other reasons look less secure.
Take China. It has had a huge impact on world supplies, not
just through its stockpiling but its farm support programmes which have
involved buying the fibre at $1.30 a pound or more to support domestic growers.
China will not want to take any action to reduce the value
of its huge inventories. But it does not appear to have a strong hand.
Especially if, in 2013-14, it near halves imports to 7.0m
bales, as Rabobank predicts, so removing a huge demand from international
markets, but doing nothing to erode China' cotton mountain.
One extreme to the
But that assumes, of course, that published estimates have a
decent grip on Chinese data.
Another reason cited for cotton prices remaining relatively
high is scepticism that supplies of the fibre are indeed as rich as these
"People can't figure out how we went from historically tight
stocks, which drove prices to all-time highs, to record stocks so quickly," Keith
Brown at brokerage Keith Brown & Co said.
If markets are teasing out the truth on supplies, as they
often do, especially when it comes to China's non-transparent supply dynamics,
then there may indeed not be nearly as much cotton in the world as commentators
That is worth any investor in cotton thinking about if
they believe the question over cotton it whether to bet on prices rising to 85
cents a pound, or falling to 70 cents a pound.