After 18 months of trading in a narrow range, cotton prices jumped nearly 20 percent in February. Sourcing Journal spoke to Jon Devine, senior economist at Cotton Incorporated, to see what caused the spike and where the future of cotton prices lies.
To understand where those prices will go, however, one must understand where they started.
“Cotton prices had been in this range between about 78 cents and 90 cents per pound for a pretty long time, more than a year, and then we saw things move,” Devine explained. “I do want to highlight that even though we have been in this range for much of the past year, we have seen some bouncing around.”
He’s referring to the end of the summer when supply concerns pushed prices up to around 85 cents per pound before downshifting to about 77 cents in November due to demand concerns. Supply concerns again pushed that price up to $1.02 at the end of February—vaulting prices out of the range the market spent the last year and a half in.
One of those supply concerns was regarding west Texas, where about one-third of the United States cotton acreage is located. Due to the region’s four-year drought, prices held high last July and August.
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“We’ve got some vulnerability to our supply due to the concentration in west Texas; it’s been a bit challenging there,” Devine said. “Then the market started taking a look at the demand side and thing have been sluggish over there [which] helped to push prices down; you can have low supply but if there’s not a lot of demand, [it] doesn’t really matter too much.”
Things have shifted.
“I think there’s been a bit more optimism about demand, and now we’re paying more attention to the supply issues that we might be having,” Devine said, citing some examples.
“On top of there being a small U.S. crop, China has been a very aggressive buyer of cotton from around the world in recent months,” he continued. “So, all that contributed to this run in prices that we’ve had over the past several weeks.”
The market may have gotten ahead of itself with prices north of $1, Devine suggested, but even as of March 4, prices are higher than that previously established range. Thus, the question remains: Are these gains going to be sustainable or not?
“One reason why these prices may not be sustainable is that China will ‘turn off’ it’s buying because it doesn’t make sense for them anymore because that price cap is closed,” Devine said, explaining that it may be more favorable for the China market to use Chinese cotton.
Continuing with price dynamics, the Commodity Futures Trading Commission (CFTC) saw a wave of speculative buying on the futures market. The International Cotton Advisory Committee (ICAC) noted in a recent press release that the actions of speculative buyers “significantly increased” the demand for futures contracts, ultimately “exerting an upward force on cotton prices.” According to Devine, speculators shifted from net short to net long at the same time prices broke above 85 cents.
“The real story will start to unfold in the next few months when planting intentions are solidified—at least in the Northern Hemisphere,” the ICAC said in a LinkedIn post. “Planting intentions have been lower than in previous years, and it remains to be seen whether the recent higher prices will incentivize farmers to increase the area under cotton.”
If the planted area remains under previous seasons’ levels, the committee continued, and consumer sentiment improves—thus driving up demand in the 2024/2025 season—then analysts can “certainly expect” higher prices to not just materialize but be justified “by fundamentals,” particularly considering the lower stocks in many of the largest countries, the ICAC said.
Devine agreed, stating, “we just don’t know yet.”
“The big question that we have is when is the recovering demand going to surface?” he asked. “Has it happened already, or has the market gotten in front of it?”