Market Expectation: The Impact Of Inflation And Sharp Rise In Interest Rates Will Slow Down Cotton Prices

CottonIncorporated said in its latest report that it is still some time before 2024/25, and the time period for the forecast to be revised is still very long. The current forecast clearly shows that cotton production will increase this year, which means more cotton can be consumed and exported. However, the growth of demand side is still uncertain.

The impact of inflation and sharp rise in interest rates has emerged, and countries around the world have been affected to some extent. Although the US economy is expected to slow down, this important clothing consumption market will avoid recession after interest rate hikes (IMF estimates that the real GDP growth of the US will be 2.5% in 2023, and 2.7% and 1.9% in 2024 and 2025 respectively). Europe has experienced a more serious decline in economic growth, but is slowly improving (the International Monetary Fund estimates that the real GDP growth of the euro area will be 0.4% in 2023, and forecasts that the GDP growth in 2024 and 2025 will be 0.8% and 1.5% respectively). This shows that the commodity consumption prospects of these major consumer markets seem to be stabilizing after a period of persistent concern about the economic recession. If the fear of the upcoming recession can subside, it may give retailers and brands more confidence to place larger orders.

Similarly, the final bottoming of cotton prices may give spinning mills confidence to purchase more cotton. After the price soared in 2021/22, the settlement price of New York/intercontinental futures contract only briefly fell below 75 cents/pound (to 72 cents/pound at the end of October 2022), then rebounded to more than 80 cents, and most of the subsequent transactions were more than 80 cents. Due to the weak downstream demand during this period, the cotton price higher than the long-term historical average makes the spinning mill very uncomfortable, especially the serious financial losses caused by the price collapse in the middle of 2022 and the subsequent shipping crisis.

The current fall in cotton prices will lead to a clearer bottom in the market, which may ultimately support the purchase volume. Since there is less room for further price decline, there is a greater possibility of price rise. The forecast of the US Department of Agriculture also shows an increase in purchasing interest. USDA estimates that the cotton demand of all spinning countries in the world will increase in 2024/25. It is reported that the order volume of the supply chain is increasing, but the demand recovery may be gradual due to the geopolitical uncertainty and the non stimulating interest rate. It is expected that the trend of cotton price will be determined by the speed and intensity of demand recovery, and it is also necessary to comprehensively consider the impact of the possible growth of global cotton production and available exports.