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Rebound in cotton prices attributed to supply deficit

09
Apr '10
According to insights from raw materials experts cited in the analysis, in the next 12 months cotton, key materials used in many healthcare products – will experience price increases as the international economy rebounds, the value of the dollar increases and demand exceeds supply.

Cotton prices have rebounded after the steep decline that coincided with the onset of the credit crisis.

According to Cotton Incorporated's Supply Chain Economist Jon Devine and Senior Manager of Supply Chain Initiatives Jan O'Regan, much of the rebound in cotton prices can be attributed to a supply deficit in the current 2009/2010 crop year. With corn and soybeans offering farmers more attractive returns for the past several seasons, cotton acreage and production have declined worldwide for the past three crop years. Despite the reduction in production last crop year, the reduction in consumption brought about by the weakness in the global economy kept prices low. Due to large numbers of cotton farmers and low cotton prices last year, governments in China and India made significant purchases to reduce excess supplies and support prices.

As the global economy has strengthened over the past 12 months, demand for cotton re-emerged and it is expected that the amount of cotton consumed in 2009/2010 will exceed that amount of cotton that was grown by 13.5 million bales (about 12 percent of 2009/2010 world consumption). Making up this production deficit are cotton stocks. Virtually all of the cotton that was accumulated by China and India has since moved out into the market. When stocks are drawn down, prices tend to increase and this is a major reason why cotton prices have rallied in recent months.

Devine and O'Regan predict:

• In the short term, which can be defined as the time period before next crop year's harvest becomes available in the fall, prices can be expected to at least maintain their current trading range due to the production/consumption gap.
• In the longer term, the question is whether the expected increase in cotton production in 2010/2011 will be large enough to overcome both the production/consumption inherited from the 2009/2010 crop year and any consumption growth in 2010/2011. With cotton prices the most favorable they have been in years, current forecasts project a more than 10 percent increase in world cotton acreage and production in 2010/2011. World cotton consumption is forecast to increase 2 percent in 2010/2011.

Devine and O'Regan emphasize that planting decisions, which are currently being made in major cotton growing countries, and the weather throughout the 2010/2011 growing season are principal sources of uncertainty in the current cotton market.

Premier Inc


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