|May 2 2011||Commodity news and trends|
|Cotton is an input to the textile industry, competing with other fabrics, notably synthetics (polymer based) and also other natural products, such as wool. The processes for converting cotton into useable textiles are complicated and well-known, and have seen continuous technological improvements.
The explosion in cotton prices in February and March follows many years when the price trend was more or less flat, and therefore falling after adjusting for inflation.
Many years with no growth in worldwide land in cotton production meant that steady increases in demand were met through a continual improvement in yields.
It has taken time for world cotton markets to feel the full impact of the elimination, in January 2005, of the former Multi-Fibre Arrangements, which ended many trade quotas.
The result has been greater international linkages between national cotton markets, so that poor harvest conditions in India and Pakistan have contributed to sharp upward pressure on prices.
The steady decline in inflation-adjusted cotton prices reached the point where it has begun to reverse the multi-year decline in the share of cotton use in the textile industry, placing a floor on cotton demand.
The surprise is not that prices have gone up, but rather that increases did not happen years ago. One factor in the timing of the current increases has been reflation of national economies, with increased cotton prices an early indicator of the price increases to come in a broader ranged of commodities.
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