By Malini Hariharan
Prices have fallen 38% in July with cotton for December delivery quoted at 98.63 cents/lb on the Intercontinental Exchange.
The swift correction in prices is based on expected increase in acreage across the world. Global production for 2011 is forecast at nearly 123.2m bales, up 7.5% from 2010.
The US department of agriculture (USDA) recently estimated that cotton acreage in the country was up 25% from last year. China is forecast to produce 33.0m bales, an 8% rise from a year ago.
In India, the world's second largest exporter of cotton, cotton sowing has seen unprecedented growth and acreage is expected to rise 8% in the current season. And barring any flooding Pakistan too is likely to see production expand 17% this year.
This increase in global acreage should be sufficient to take care of weather disruptions such as the flooding in the Mississippi cotton belt and drought in Texas. The USDA has estimated 42% of the crop in the top 15 cotton producing states as very poor or poor and only 28% as good or excellent.
But any more disruptions could easily trigger a rise in prices as this report in the Financial Times suggests.
"The world has planted enough acreage to handle a disaster of one of the greatest proportions it has seen, in Texas. But it cannot handle a second one," warned Joe Nicosia, chief executive of Allenberg Cotton, the world's biggest cotton merchant.
Meanwhile, there have been problems on the demand side as well with Chinese imports from January to June falling 32%. Lower-priced polyester has expanded its market share at the expense of cotton. And now with prices correcting buyers are unlikely to be interested in building cotton stocks.
However, Nicosia suggested that cotton does not have much further to decline. Although he warned the industry to be prepared for another year of huge swings.
Meanwhile, polyester has yet to react to developments in cotton. Prices have remained firm based on the strength in raw material purified terephthalic acid (PTA) and monoethylene glycol (MEG) markets.
But some polyester producers have started expressing concern and expect polyester prices to also fall in the coming months. Cotton pulled up polyester last year and there is nothing to suggest that the reverse cannot happen.