Global Cotton A index has reached its highest level in 118 months, with ICE futures already flirting with $2.5 per kg. By September end, cotton prices in the domestic market were already up by 76 percent over last year, foreboding a rally in prices of cotton value-add products locally. But how far will that rally go?

When it comes to fibre prices, it is often useful to remember one cardinal principle: wild swings in prices may only occur once in a decade, but once commodity prices start their upward climb, they can steer off course for a considerable period. For example, cotton price spiral of last decade that began in late 2009 had peaked by March 2011, but it took another 18 months (post-peak) for prices to return to their pre-spiral range.

By that token, although world cotton prices have already been rising for past 18 months (since they hit Covid bottom in April 2020), it may take another – or even two - global harvests before prices peter out. China’s novel workaround the Xiangyang cotton ban – and reserve building through raw material imports from US! – has also thrown a spanner into the works. What will it take for world cotton supply to replace Xiangyang cotton is anybody’s guess; and it remains to be seen how far the two superpowers will take this battle of wits before the ban is finally lifted.

Either way, it is now becoming obvious that cotton’s great leap forward will not only be priced-in by value-added producers, but the increase may also become permanent going forward. By September 2021, cotton yarn prices had already increased by 37 percent year-on-year, based on Wholesale Price Index (PBS). Higher value-added products have also witnessed a rise in price levels, with cotton fabrics, towels, and hosiery each increasing by 13 percent; while bedsheet and readymade garments prices rose by 7 percent, year-on-year. Is the country facing heady days ahead when lawn prices also run amok in local market?

Although the question demands more research and deeper investigation, a brief look at 3-year WPI Textile group data shows that this isn’t the first-time value-added products prices are undergoing adjustment. Consider that readymade garments price index rose by 16 percent between Sep-18 and Sep-19, and then increased another 7 percent in the following 12 months. Other value-added cotton-based goods have followed a similar pattern, witnessing smaller but consistent year on year price increases between Sept-18 and Sep-20.

This is significant, as world cotton prices were already on a downward trajectory during the pre-pandemic years, and 6-month moving average fell from $2.04 per kg in H1-CY18 to $1.62 per kg by H2-CY19. Yet, price of local cotton value-added products rose concurrently not only in response to rising domestic inflationary pressures and depreciating currency, but also due to rising export opportunity amid finite output.

This is hardly surprising, considering that domestic yarn output has remained static at 3.4 million tons since FY16. On surface, it appears that as exports became lucrative in 2019 due to depreciating currency, the incentive to capitalize on forex gain meant letting go off domestic revenue (since overall industry output did not increase). Moreover, history suggests that higher the product lies on the value-addition ladder, the smaller yet irreversible the increase in local market prices.

While it is too early to jump to conclusions, the textile export target set by the industry for FY22 may not appear so wildly off the mark. Even without substantial increase in absolute output, the industry may find economic sense in capturing the export opportunity right now while world cotton prices are still high, by letting go off some domestic revenue (in the short-run). If world cotton prices stay high for long enough, value-added prices shall go up in the local market irreversibly. The unsatiable domestic lawn (and other garments) demand means sooner or later the bet shall pay off, even if export revenue does not sustain itself in subsequent years (once world cotton prices fall).