Understanding the Economics of Cotton

Like your 401(k) plan, cotton markets can rise and fall with economic conditions. Cotton was one of several commodities that suffered a correction in the second half of June. “Prior to the drop, cotton prices had been trading at the highest levels in a decade. The threat of recession can be expected to keep downward pressure on the cotton market,” says Jon Devine, senior economist for Cotton Incorporated.

Participants in the cotton market always face uncertainty stemming from a range of variables each season. Broad economic conditions are a factor that can affect demand, while the weather can pose questions for supply.

Cotton prices, as of July 12, are 95 cents per pound, which remains strong by historic standards, despite the 25% drop, according to Devine.

While the economic environment should limit gains, there could be support for prices rooted in supply concerns. The U.S. is the world’s largest exporter of cotton, and the most concentrated growing region in the U.S. is West Texas. West Texas is a dry region, getting an average of less than 20 inches of rain per year. Cotton is a drought-tolerant plant, making it a viable crop in that area. However, cotton needs some water to thrive and extreme drought in West Texas raises the possibility that U.S. exports may have to be rationed after the upcoming harvest.