Seshadri Ramkumar, Professor, Texas Tech University, USA
Given the ongoing inflation around the world, consumer is the king, and the demand will drive the cotton and textile sectors. Cotton will be in tight supply due to drought in West Texas, unexpected floods in Pakistan and other factors. Textile sector has focused heavily on the supply side of the equation. However, it is the demand for end products by consumers, which will drive the textiles industry. The ongoing inflation with high consumer price index values in textile importing countries like USA, EU, and the United Kingdom indicate the importance of demand as a determinant.
This year has seen high volatility in cotton prices predominantly due to the tight supply situation.
The above graph shows the volatility in the price of MCU-5 cotton per candy (356 Kgs) from December 2021 to September 2022. While the price peaked in May-22, it has started moderating, which is due to inflation fueled by Russian invasion of Ukraine, higher fuel price and slowing in consumption of non-essentials.
I have used the price situation of MCU-5 cotton, which is spun into fine counts used in home textiles, as these textiles were in demand during the COVID-19 timeframe when the demand aggregate was peaking. Cotton price situation since May 2022 shows that the demand for textiles is moderating, due to high prices for essential products like groceries.
Yesterday’s Consumer Price Index number released by the United States’ Bureau of Labor Statistics showed an increase of 8.3% over last year, indicating that inflation is still high. This fact will in a way force the Federal Reserve Bank in the United States to raise the interest rate to bring inflation under control. Higher interest rates will strengthen US dollar, which will in turn affect the cost of imported goods traded in dollar. Inflation is high at 9.9% in the United Kingdom, which will determine the buying choices of consumers. Macroeconomic situation and the ongoing war between Russia and Ukraine will dampen global consumer confidence and hence will influence the purchase of non-essential items. “Normally during the present times with the arrival of festive season in India, we see high demand for yarns. But the demand is not there,” stated Velmurugan Shanmugam, General Manager of Aruppukkottai-based Jayalakshmi Textiles.
On June 25th in a meeting hosted by the Textile Association-South India Unit in Coimbatore, attended by about 720 people of the textile sector, I articulated the importance of analyzing the holistic picture of supply and demand, macroeconomic and geo-political scenarios in planning ahead for the textile sector. “If we see demand moderation, there is a potential for cotton market to move down despite tight supply,” stated Shawn Wade, Director of Policy Analysis and Research of Lubbock-based Plains Cotton Growers, Inc.
Given the high inflationary situation we are facing now, stressful situations in EU and the United Kingdom due to high energy price, ongoing war between Ukraine and Russia, it will be in the best interest of the textile sector to plan for moderated demand in the next few months. Demand of textiles will determine the price situation of raw materials, while we have tight supply of cotton. Planning by the industry should take into consideration the demand as well as the availability of resources. Caveat Emptor et Venditor!