Cotton is an important agricultural crop used for the apparel industry. Cotton-made products are known for their quality, beauty, and their durability but lightweight. As the world’s population has increased, so has the need for cotton. This is because every day, cotton-made clothes are worn by more than 6 billion people.
Cotton’s producing industry is highly fragmented. The biggest producers are China, India, United States, Pakistan, and Brazil which produce 33M, 27M, 18B, 10M, and 9M bales of cotton every year. Most of the demand comes from China and other South Asian countries, which are the biggest when it comes to the manufacture of apparel.
The increased population and the global growth has led to more demand for cotton. This is simply because more people mean more demand for clothes. As shown below, the price of cotton rose from a low of $66 in mid-2017 to a high of $96 cents in June this year. This happened as other agricultural commodities showed some weaknesses.
After reaching the high of $96 cents, the price of cotton has dropped and is currently at $83. The decline in the price is mostly because of the issue of trade. Early this year, the Trump administration announced that it would place tariffs on a collection of imports from China. China on the other hand announced an assortment of retaliatory tariffs on American goods. Traders believe that the disruption of the industry will lead to higher-priced clothes which will in turn lead to lower demand for clothes. Lower demand translates to lower prices. However, for cotton, tariffs might not have major implications to the demand of cotton.
Another reason for the falling price is the latest World Agricultural Supply and Demand Estimates (WASDE) released by the Department of Agriculture. For any agricultural trader, the WASDE report is a handy document that should always be read. In the latest report, the department said that the acreage of cotton in the United States is on an upward trajectory. In 2016/17 season, 10 million acres were planted. This rose to 12.6 million acres in the 2017/18 season. It will rise to 13.52 million acres in the 2018/19 season. Most of the cotton harvested in the US is exported to the Asian countries.
As shown below, the price of cotton has been falling in the past few months. It is now declining with the aim of testing the 80 cents level. The current price is above the 42-day moving average and below the 21-day moving average, with the commodity channel index fading. In the short term, as traders focus on the ongoing issue of trade, the price could continue moving lower. However, in the medium-term, the pair is likely to recover and continue the upward trend.