He said the increased import demand will create a positive environment for U.S. cotton exports, which are forecast at 15.6 million bales for the 2011 marketing year – the second highest level after the 2005 marketing year.
“U.S. stocks that began the marketing year under 3.0 million bales will fall to 2.3 million bales by July 31, 2011,” Adams said. “When compared to the past 50 years, ending stocks for the 2010 marketing year will represent a new low. The United States will be essentially sold out of cotton as any remaining stocks will be committed to a textile mill, either in the U.S. or abroad.”
The economist said that when combined with projected U.S. mill cotton use of 3.8 million bales, the demand base for U.S. cotton totals 19.3 million bales for the 2011 marketing year – although with little cotton being carried forward, U.S. cotton offtake could be dictated by the 2011 crop’s size. The NCC Planting Intentions Survey revealed that U.S. all-cotton plantings in 2011 of 12.5 million acres (14 percent higher than 2010) should generate a crop of 19.2 million bales, 18.5 million bales of upland and 671,000 bales of extra-long staple.
“With a projected U.S. crop smaller than total offtake, U.S. cotton stocks are expected to fall to 2.1 million bales by the end of the 2011 marketing year,” Adams said. “Globally, a modest increase in stocks is projected, but the overall stocks-to-use relationship does not materially change from 2010.
Tight cotton supply/demand situation to continue in 2011
The rise in cotton prices is due to an overall supply and demand imbalance situation with along with pressure from competing crops in the cotton market.
The main determinant for the price rise is due to the demand being strong from “new” markets such as China and India. As China and India are “developing markets” with an increasingly large population, the number of buyers of cotton are due to increase. As seen in Figure 1, the new markets have caused the demand curve to shift to from Q to Q1 to the right, thus increasing the demand level as well as the quantity of cotton.
As the national cotton council stated, the demand for cotton in the U.S tends to be relatively stable. However, the foreign and imported demand outside the U.S is rising due to the increased mill use in foreign countries, especially China. China exports a relatively large portion of their cotton output. Therefore, in the short term, the import demand may be rising from these developing markets. On the other hand, crop failures in both the U.S and foreign countries can also raise demand for China’s products. So in the long term, the industry in China may be insufficient. It can be seen in Figure 2 that the foreign demand is not increasing but appears to have an extension at a lower price.
Another viewpoint on the continuous growth of demand for cotton is that the “available cotton stocks” were remaining “at low levels”. Stocks are the total quantity of a commodity that exists in a market. In addition, with cotton exports increasing, the supply base for U.S is estimated to also increase to 15.6 million bales of cotton stocks in the marketing year of 2011. As the cotton in U.S is increasingly being supplied by foreign countries, their U.S stocks is due to decrease by 0.7 million bales from 3.0 million bales to 2.3 million bales. This is because the mills demanding cotton is increasing. This will not only increase mill use in China, but it will also drive the selling pressure of cotton to increase whilst the U.S stocks of cotton to furthermore decrease.
The price elasticity of demand of cotton (PED) is the responsiveness of cotton demanded to the changes in the price given. A commodity like cotton has an inelastic demand meaning the value of it’s PED is less than one and greater than zero. This is due to a number of factors. Cotton is an economic good, which means it is scarce and has an opportunity cost greater than zero.
Cotton is a necessity to consumers all around the world. There are only few substitutes to replace the usage of cotton. Producers and consumers would also find it hard to adjust to other alternatives because of the large use of cotton in a lot of industries. In this case, even if the price is raised, the quantity demanded will not decrease by much in comparison due to the low elasticity of cotton.
As a result from these changes, the equilibrium price of cotton has increase from P1 to P2 in Figure 3 as well as the quantity supplied increasing from Q1 to Q2, meaning that more of the product is being bought at a higher price due to rising demand. The inelasticity of both demand and supply of cotton can be seen here from how steep both the demand and the supply curve are.
Since the cotton market is not in ceteris paribus at a certain time, other factors like opportunity costs, tight demand/supply markets and demand of cotton from mill can cause persistent increase of demand. The effects of this economic change on stakeholders will cause the supply of cotton to decrease for domestic producers as the foreign producers have increase their supply due to pressure of population rising from new markets. In the short run, while a growth in demand of cotton is expected to increase cotton prices, the quantity of cotton produced and the amount of cotton stocks available will not drastically change. Therefore, in the long run, the export demand of foreign markets will increase due to the size of the population rising, the U.S will not have to stock up for cotton.
