By Robert Antoshak
Managing Director, Olah Inc.
There are a number of reasons for the surge in cotton prices. Simply stated, there is a shortage of the stuff. How did this shortage sneak up on us? A number of factors came together to create a supply imbalance not seen in cotton since before the World War I.
First, global stocks of cotton were drawn down sharply as less cotton was grown and shipped through the global supply chain due to competition from other crops. Many farmers switched to different crops when cotton was below 80 cents per pound. In particular, the ethanol boom of a few years ago convinced many farmers it was time to switch into corn production as corn paid better than cotton. Previously, cotton had been stuck in an anemic price range of about 40 cents to 70 cent per pound. Corn, on the other hand, soared when government support of ethanol production pushed that commodity up to unheard of price levels with corn now worth more as a fuel additive for our cars than as fuel for our stomachs!
Flooding in Pakistan, a poor crop in China and a bad Monsoon in India combined to seriously undermine global cotton production in the season leading up to the recent surge in cotton prices. As much as one quarter of the global cotton crop was somehow affected by this bad weather and at a time when there was less cotton grown because it was more profitable for farmers to grow other crops. This is only the beginning.