26 June 2020
At the start of the COVID-19 pandemic, demand for cotton plummeted.
Historically, a large decrease in global cotton demand occurs during downturns in economic activity. If individual income decreases, new clothes purchases are one of the easiest consumer outlays to reassess. For example, during the global financial crisis, global cotton demand decreased 11 per cent. During COVID-19 however, the extreme lockdown measures imposed by governments around the world resulted in the closure of cotton ginning facilities. This meant that cotton sold ahead of the pandemic could no longer be shipped. As a result of both these economic and logistical factors impacting demand, cotton futures decreased 30 per cent in price between February and early April. Prices of near-dated cotton also sold off more than prices of longer dated cotton, giving warehouses economic incentive to store cotton and carry it forward to a period in which demand might be higher.
Among other policy agreements, China made efforts to uphold its end of the Phase One Agreement with the US to dramatically increase their purchases of US agricultural products, including US originated cotton. As a result, prices rallied, incentivizing US producers to take their product out of the US government reserve, freeing up more stocks for export.
Cotton and polyester are the two main materials from which clothing is made. While there are consumer preferences towards one or the other, there is some switching depending on price sensitivity. For example, if polyester becomes very cheap versus cotton, it is likely that polyester as a percentage of total clothing material will increase, further pressuring the industry. Across the globe India, Pakistan, Bangladesh and Vietnam have very large cotton spinning and weaving operations, i.e., turning cotton into fabric and yarn. Less demand for finished cotton products means these spinning operations will have to slowdown or temporarily stop, resulting in lost revenue and potential unemployment. This may lead to a delay when the fashion industry wants to or can start buying again.
Chase Bender, Macquarie agricultural commodities analyst