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Rising cotton costs could spell disaster for many

Cotton: It’s everywhere. And we take it for granted it is affordably priced. But things may be changing, as the price of cotton per pound has soared to levels not experienced since the Civil War, reported WWD.
Mark Messura, senior vice president of global marketing supply chain at Cotton Incorporated, reported this alarming news to industry executives during his cotton market analysis at The Union League Club.

Messura explained to WWD what is happening: “What’s going on in the cotton market is unprecedented. A fundamental balance has tightened with exported crops nearly sold out worldwide.”

China, which has the distinction of being the world’s largest cotton producer, has nearly all of its exported crops sold out, and fully 98 percent of U.S. cotton exports are sold out on paper, reported Messura. Global production of cotton has substantially decreased, by 40 percent, as more and more turn to planting corn and soy to go after ethanol money.

Nevertheless, Messura believes China’s focus on growing food for its population of more than a billion should take precedent over producing cotton. The nation currently needs more than 30 million cotton bales per year. As the Chinese turn to world markets to supply their cotton, market prices increase. Cotton, he reports, is in short supply in China.

Natural disasters, for example the ones that devastated Texas farmland, certainly have not helped matters. What Messura calls a “fundamental mismatch” is occurring: Mill consumption of cotton is outpacing production. This spells a potential problem: International cotton production for 2010-2011 is estimated to come in at 114.5 million bales. Mill consumption, however, is likely to wind up higher, at 117.1 million.

Higher prices are not the only concern facing mills, suppliers, manufacturers and retailers. Over the long haul, the uncertainty and volatility could be worse than rising costs.

“This kind of volatility is not narrowing the problem, it’s amplitude is still creating a problem … I would really be hard-pressed to say cotton prices will drop to $1, but I see a correction in the market, fundamentally a short amount of cotton moving forward until December,” Messura said.

Cotton prices per pound are currently at $1.46, as of Friday. The WWD Fiber Price Sheet reveals that from March 28 to April 25, cotton prices have risen 13 cents per pound. Brazilian companies are harvesting for $1.65 a pound for August to September supply, while companies buying cotton for fall deliveries are in the region of $1.60 to $1.65.

Messura’s prediction: “I would anticipate high prices to continue over the next several months, in the $1.50 to $1.80 range. Mills without firm deliveries over this period are at risk … More planting this year may not necessarily result in larger crops. The most vulnerable will be the spinners and fabric mills that are not vertical.”

He forecasts a shortage of fundamental cotton fabrics, reduced production and potential closures.

All these difficulties have lead to companies being forced to pay upfront before their cotton contracts are respected, between 30 percent to 100 percent.

“We’re already seeing a shifting of cash flow in the supply chain. Lots of companies are bringing their chief financial officers to meetings,” said Messura.

Tagged in: china, price, cotton,

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Purple Neon/LadyLUX via istock

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