Cotton outlook: downward spiral?

Six producers, five importers, and four exporters dominate the world cotton market. And while Pakistan still features in the first two out of three categories, the devastation of cotton crop in the country earlier this year seems to have had little effect on the international markets. The global recessionary headwinds appear to have decisively determined the trend for cotton markets over the next year, with CotlookA index falling by 38 percent in the last six months alone.

World cotton prices have fallen to their lowest level in 16 months, projected to soon fall through the crest of 70 cents per lb in coming weeks. This marks the certain end of the rollercoaster ride that lasted for over two years. Cotton prices rose from the ashes after the Covid bottom (April 2020), climbing almost three times over the following 25 months. Between April 2020 and May 2022, world cotton prices rose from 50 cents to a peak of $1.47 per lb, before finally turning around with the beginning of 2022-23 season.

Granted, the monsoon flooding that hit Pakistan’s farms did slow cotton’s mighty fall in its tracks between August and September, but the steep decline has since resumed. Over the last 10 days, spot prices have fallen by nearly 11 percent, with no end in sight.

This follows the monthly WASDE update, which has shattered all hopes of recovery. USDA projects world cotton output during 2022-23 marketing year at its highest in at least three years, and world stock-to-use ratio at 76 percent – highest since at least 2015-16. This effectively means that world cotton demand is expected to fall to its lowest in seven years, minus the unusual slowdown during the pandemic year.

USDA is of course not alone in spelling doom. Retail chains across USA are announcing once in a decade discounts and sales on apparels and textile, portending the slowdown projected as the Fed tightens the screws on the economy. That means Pakistan may witness slower than expected demand for imported cotton, despite the loss of local crop to floods. Although that might mean good news for the import bill, the snowball effect for export value chain could more than offset any gains.