Cotton got a shot in the arm from the USDA’s Wasde report of 9 February. That estimate cut US ending stocks for 2020-21 to 4.3m bales from January’s 4.6m and left US production at a shade under 15m bales, but cut global ending stocks from its previous 96.3m bales to 95.7m.
This was the moment cotton bulls had been longing for - cotton futures on ICE jumped by 3% after the Wasde report, and the March contract settled 3.1% higher at 86.93 cents per pound - the highest since August 2018.
That’s still a far cry from the March 2011 peak of more than $2 per pound and - in the other direction, a mighty distance from the slump to as low of some 48 cents in early April 2020, the lowest since 2009. The cotton price has thus doubled in less than a year - prompting some to speculate that inflationary pressures are rising.
The last time we saw such a price gyration was in 2008-11, when the price crashed as low as some 36 cents and then - thanks to the wave of central bank and government easy money - it shot to the record high of $2.27.
Perhaps there are strong fundamental reasons for cotton’s recent strength.
The world economy appears to be recovering much better than originally feared after the outbreak of Covid-19. The International Monetary Fund (IMF) in January slightly improved its expectations for global growth this year, to 5.5%, with China, the world’s biggest cotton importer, powering ahead by 8.1%.
Supplies are looking tighter in the longer-term. The National Cotton Council (NCC) now says that, according to a survey of planting intentions conducted in December, US cotton farmers intend planting 11.5m acres this spring, more than 5% down year-on-year.
Of course improving prices will no doubt encourage greater cotton planting, but it’s a straw in the wind. And as the prices of alternative crops such as corn, soybeans and wheat (all up between 25% and 50% in the past six months alone), there will be stiff competition for US acres.
US ending stocks in 2021 could well fall to 2.6m bales, one of the lowest levels in 20 years.
Ride the wave
Buying clothes has not been stopped by Covid-19; the pandemic has simply shifted that purchasing on-line and many brands have nimbly adapted to the new environment. The biggest brands have even made a sales-virtue out of displaying their donations to Covid-related charities.
While this underlying demand for cotton products has proved far more resilient than hoped for, an additional stimulus to demand has arrived in the form of exceptionally loose monetary policy from the US, the UK and the European Union (and elsewhere).
President Joe Biden is intent on pumping $1.9 trillion into the US economy, following a $900bn stimulus package last year. With record low interest rates and an apparent readiness by the US administration to spend, spend, spend, it would be unwise to suggest that cotton futures - as other futures - have reached their peak. We only have to look back as far as 2011 to see what can happen.