Rising cotton prices may not be sustainable

Disclaimer/Note: Please take serious note of the fact the views expressed here are merely speculative and based on the observations and understanding of the authors of this blog post, and should not be taken otherwise. Strictly, this should not be taken as an investment advice for people holding futures or options in cotton commodity trading. Textilestock.in will is not in the business of proving investment advice on trading of any financial instrument, and hence will not be liable for any implication whatsoever for actions following the views expressed in this blog post.)

The Economic Times, on 9th Feb, published the article “Cotton farmers smile amid global, local demand and price pick up”. Here are our views on how cotton prices will fair in the short to medium term on the commodity exchanges. We predict that in the short to medium term future, the cotton prices will fall due to various reasons.

The above mentioned article states that China is India’s biggest customer for cotton and China is also the largest garment exporter to USA. There is a growing demand for cotton from China, which is a direct result of the increase in demand of textile products in the US due to economic recovery from recession. As per our understanding, this is true and is surely a major reason for rise in cotton prices since the demand of cotton from Chinese exporters have risen.

We believe that the demand of textile products in the USA has recovered but this recovery might be unsustainable. A clue to this might be found in the February edition of The Economist in the article on America’s budget. In fact, this sudden surge in demand of textile products may be a result of long refrain from purchases of clothing and general textiles on part of the US consumer due to economic recession. Once this wave of sudden demand is over after the consumer has stocked their requirements, the spending on clothing and textiles will significantly reduce. Thus the demand for cotton will reduce and its price will fall.

Other factor which will contribute to falling cotton prices in future will be the fact that this year’s agricultural output of cotton fiber is expected to be good. This will indeed increase the supply for better quality raw cotton from India in the international as well as domestic market and that will pull the cotton prices down.

Once the demand for textile products falls, many companies will have to deal with inflated inventories. If your company happens to be dealing with such as issue, don’t forget to list you products on www.textilestock.in.