Cotton Prices Hit 10-Year High

Market News

Cotton Prices Hit 10-Year High

Cotton prices surged to a 10-year high, reaching US$ 1.16 per pound and touching levels not seen since July 7, 2011.
So far, higher costs are being passed along to consumers.

The last time cotton prices were this high, it was July 2011. “In 2011, we needed a prayer meeting,” Levi Strauss Chief Executive Chip Bergh told investors last week. Bergh recalled how he had just joined the denim retailer and was learning his way around Levi’s business. But he was also staring down a historic surge in cotton prices. Cotton had skyrocketed above US$ 2 a pound, as demand for textiles rebounded from a global financial crisis, while India — a major cotton exporter — was restricting shipments to help its domestic partners. In 2011, consumers felt the impact. And it also ate into companies’ profits. Bergh sits in the camp with analysts and experts who say the current cotton price inflation will be less damaging to the industry. Manufacturers and retailers have pricing power. Companies will be able to pass along the higher costs without destroying consumer demand. “It’s a very different situation today,” Bergh explained. “We’ve been able to take pricing over the last 12 months and it’s sticking. ... We priced ahead of some of these inflationary pressures hitting us.” Cotton prices surged to a 10-year high, reaching US$ 1.16 per pound and touching levels not seen since July 7, 2011. The price of the commodity rose roughly 6% this week, and is up 47% year to date. Analysts note that gains are being intensified further from traders rushing to cover their short positions. With the ban on Xinjiang cotton, China is now buying cotton from the US. Extreme weather, including droughts and heat waves, have also wiped out cotton crops across the US, which is the biggest exporter of the commodity in the world. In India, deficient monsoon rains threaten to hurt the country’s cotton output. “We think inventory will remain rational, margins will remain strong, and retailers will be able to push bigger and more consistent price increases than they’ve been able to for over a decade,” analysts believe. They expect the cotton inflation will be transitory. UBS analyst Robert Samuels said the retailers he expects to be hardest-hit by the rising commodity prices are those that specialise in denim. Cotton accounts for more than 90% of the raw materials used to make jeans and other denim goods. A more severe spike But Levi has already attempted to assuage any fears about its denim business. In its earnings call, Levi said it has already negotiated most of its product costs through the first half of next year, at very low-single-digit inflation. For the second half of the year, it expects to see a mid-single-digit increase. And Levi said it plans to offset that hike with the pricing actions it’s already been taking. Cotton accounts for about 20% of the cost to make a pair of Levi’s jeans, Chief Financial Officer Harmit Singh said, with every pair of jeans containing about two pounds of cotton. According to analysts at Goldman Sachs, it will take a while before the rising cotton costs even begin to show up on retailers’ income statements, given the timing of contracted cotton purchases. And it’s worth noting that in 2011, cotton prices spiked to more than US$ 2 per pound, which is well above where the commodity is trading today. Behind all-time high cotton prices, a sharp dip in expected yield The narma/kapas (raw unginned cotton) prices are hitting all-time high rates in the cotton growing states of the north, particularly in Punjab and Rajasthan, while Haryana mandis too are witnessing rates much above the Minimum Support Price (MSP). The spike in price comes amid farmers expecting the lowest production of cotton in the past five years due to the attack of pink bollworm pest in some parts, surplus rain in Haryana’s cotton belt in August and September months and overall less area under cotton crop in the region this year. According to the Cotton Corporation of India (CCI) and the Indian Cotton Association Limited (ICAL), this year cotton was sown on total of 16.99 lakh hectares (LH) in north region, including 3.03 LH in Punjab, which has witnessed an increase of around 52,000 hectares this year against last year; 6.88 LH in Haryana, which is 49,000 hectares less than the last year; and 7.08 LH in Rajasthan, including 3.44 LH and 3.64 LH in upper and lower Rajasthan, respectively. In Rajasthan, one lakh hectare less area was cultivated under the crop this year as last year the cotton area in the state was 8.08 LH. Last year (2020-21 season), total 17.96 LH was under cotton in the three states and total production output was 62.67 lakh bales — including 10.13 lakh bales, 23.04 lakh bales and 31.40 lakh bales in Punjab, Haryana and Rajasthan, respectively. After the attack of pink bollworm in several parts of the cotton belt of the three states, damage due to rain, the expected production from these three states is around 52.89 lakh bales this year which would be around 10 lakh bales less than last year. From Punjab, production of 10 lakh bales is expected, from Haryana 16.50 lakh bales and 28 lakh bales are expected production from Rajasthan. The ICAL figures show that this year the northern states will witness lowest production in the past five years. As per records, in 2017-18, area under cotton in the three states was 16.71 LH and the production was 57.79 lakh bales. In 2018-19, this figure was 15.31 LH under cotton and production was 60.08 lakh bales. In 2019-20, 18.67 LH area was under cotton in the three states and the production was 59.94 lakh bales. Despite less area under the crop last year, Punjab’s production was more than expected. This year, even after having 520,00 hectares more under the crop, pink bollworm is the main reason of less production in Punjab where the rates are above Rs 7,700 per quintal for kapas against MSP of Rs 5,925 per quintal. Mainly three pickings of cotton take place as first picking crop is coming to the mandis currently in which 30% cotton arrives, in the second picking in November month 45% cotton reaches mandis, and remaining 25% arrives in third picking in December. Huge demand for cotton from India, and other countries Another reason for the spike in prices is huge demand of the cotton from China, which is the largest importer of the cotton crop, as well as from the local spinning industry. Due to dip in production, local industry too wants to purchase as much cotton is available in the mandis. Even the big cotton stockists are purchasing cotton, said experts. Cotton expert Sanjiv Dutt, Vice President of Winsome Textile, Bathinda, said, “Cotton prices are high because after stagnation due to pandemic the textile industry is witnessing a fast recovery now and there are reports of highest growth rate for industry in India, Pakistan, Bangladesh and Vietnam where textile industry will boom and in China the demand would be very high leading to further import by the country”. Spinners are already raising the demand for stopping exports, so that cotton is amply available to domestic market. Adilabad cotton procurement from Oct 20 Adilabad Collector Sikta Patnaik said the cotton procurement from farmers will begin from October 20. She convened a meeting with cultivators, farmer leaders, traders and the officials of Cotton Corporation of India (CCI). Sikta stated the minimum support price (MSP) fixed by the government was less than that of the market. She said that steps were being taken for the smooth procurement of the cotton. She informed that the crop was cultivated in 3.90 lakh acres across the district and the crop yield is expected to be 27 lakh quintals of cotton this monsoon season. The Collector instructed the officials concerned to make necessary arrangements for carrying out procurement of the crop and avoid inconvenience to farmers. She asked the authorities of the CCI to offer MSP to the growers and requested traders to buy the produce from the farmers. She stated that the kharif cotton has been sold for around Rs 7,500 per quintal in the market. Waterlogging ruins cotton, bajra on 80,000 acres in Rewari, Mahendragarh Waterlogging has caused damage to barja and cotton crops spread over 80,000 acres in Rewari and Mahendragarh districts. The losses have been assessed in over 37,000 acres in Rewari, while these are in over 43,000 acres in Mahendragarh. In Rewari, damage up to 50% has been recorded in cotton crops spread over 12,000 acres. Similarly in Mahendragarh district, up to 50% loss has been calculated in cotton crop, on 15,000 acres. Mahendragarh and Kanina blocks have recorded extensive damage to the crops, said sources. Deepak, SDO (Agriculture), Rewari, said, “Around 35 among 77 villages in Jatusana block are worst affected by waterlogging, where up to 70% loss in cotton crop has been registered, while around 50% damage has been recorded in the remaining villages.