Supplying Lack Leads to High-Price Cotton

At the end of last year, with the introduction of the strong price control measures and a series of floating tight policies, the price of agriculture products obviously had some retracement at home and abroad. However, with the fading of the domestic tight policy, the price of overseas agriculture products formed a new round of increasing situation; while the cotton price had already broken through the high point of last year. Consequently, we should draw some lessons from the tendency of the overseas agriculture products’ prices. China’s demand will be an important hyping theme for the agriculture products, including the cotton, which will have high prices for a long term.

The cotton output of 2010/2011 is continuously dropping; the recovery of consuming demand will be beyond prospects. According to the data from USDA (United States Department of Agriculture), the consumption of global cotton surpassed the output 15%, which leads to a sharp decrease of the international stock of cotton and a crazy increase of the cotton price. However, the price of agriculture products has a general increase this year, which makes people expect more on the cotton market of 2011.

The downstream yarn factories had an unprecedented high-profit situation. The rising of the yarn price was one of the main causes of the big increase of the cotton price last year; while the prelude was the Chinese government and the low commercial stock. China’s cotton was under producing for ages, 25% to 30% of consumption might be from the import. Last year, the cotton output was 6.40 million tons while the consumption was more the 10 million tons; this big gap of consumption can only be filled by import. Moreover, the change of inland importing demand will also have great influence upon the international cotton price. Recently, the foreign cotton quoted around 160 cents to the main ports in China, which converted into the national delivery price is almost 28 thousand Yuan; this was a big support to the spot goods at home.

Statically speaking, the big demand gap exists in China market this year will make the cotton price lack of motivation to drop. However, under the circumstance of the balanced tendency of global resources, how much space will there be for the cotton price to reach a new high point? And how the supply-demand relationship of the cotton market is going to be this year? We consider that, besides the cotton output and the stock at the beginning, the national policy, the exchange-rate change and the temp of importing foreign cottons will all be the causes that cannot be ignored.

The factors that affect the cotton price are various and complicated, but the major is still supply and demand. The consuming ability and preference of the consumers, the supply and price of the alternative products, change of the population, change of commodity composition and etc. should certainly be considered. In addition, factors like economic fluctuation cycle, financial monetary factor (interest rate, exchange rate), political factor, policy factor, natural factor, invest and psychological factor, etc. can all influence the cotton price by supply and demand.

From the trend of the supply, the cultivated area of the cotton will still reduce; the reason is that our national food security strategy position will not be changed currently. Only when the cotton price rose to a sufficiently high position that can help to increase the cultivate area. From the demand, besides good benefit and the production enlargement of the textile manufacturers this year, the increase of the price also stimulated the investment and speculation. This is why only when there was over-production and deteriorating demand that the disjunctive change will occur. In other words, if RMB appreciated greatly, the macro-economy failed again, or the loose currency environment ended, which lead to demand deteriorating; then the general increasing tendency of the cotton price will change. Otherwise, the high-price cotton will be a normal phenomenon.

The trend of the recovery of the global economy is becoming stable, which still creates a relatively steady external environment for Chinese textile industry. The continuous increasing of the domestic trades became the main power which supported the cotton consumption of the industry. Because of the increase of raw material price and the labor force cost, the profit margin of the cotton industry will have some kind of decrease.

On the whole, we think that the overall situation of the cotton price fluctuation will be smooth and steady in 2011. Due to the macro-control and a series of uncertain factors, we estimate that the main contracts of Zheng cotton are around 22,000 and 31,000 Yuan per ton and there will be a “first half-year high and next half-year low” tendency.