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Garment makers are seeing demand shrink as consumers in the US and Europe are cutting back on spending. US cotton consumption is set to fall 6.5% from last year to less than a million tonnes whilst EU consumption is expected to fall 11% to about 460,000 tonnes, the Economist Intelligence Unit (EIU) predicts. (demand curve shifts left)

At the same time, garment makers are hit by more expensive raw materials and by soaring oil prices, which make their factories more expensive to operate and which pushes up the cost of shipping to foreign markets. Furthermore, in the US, ever more cotton farmers are switching to more lucrative crops - soybeans, corn, and wheat - whose market prices are rising even faster. The prices of these crops have been pushed higher by a mixture of subsidies and market speculation. As a result of the shift by farmers, "the cotton harvested area in the USA is projected to decline by a further 15%" in the year ahead, predicts the International Cotton Advisory Committee (ICAC). That would bring the cotton acreage in the US to 9.5 million acres, down from 10.8 million in 2007 and from whopping 15 million acres in 2006. (supply curve shifts left)

Cotton shortages first emerged last year, when global demand for cotton exceeded global supply by about a million tonnes.In spite of the US shift towards competing crops, this year, the global cotton harvest is set to grow 3%, as major producer regions such as China, India, Australia, Brazil and West Africa are raising production. Globally, supply growth is thus outstripping demand growth. But even so, supply is not growing fast enough. This year's production level is expected to peak at 26.9 million tonnes of cotton, compared with demand for 27.5 million tonnes, the ICAC predicts.

(greater supply growth does not indicate supply exceeds demand; global demand for cotton still exceeds global supply by about 0.6 million tonnes)

Both supply and demand curve experience a leftward shift. However, a projected increase in price for cotton -- 2008/09 - 80 cents per pound up from 2007/08 - 74 cents per pound , is indicative of a greater shift of the supply curve.

adapted from: http://news.bbc.co.uk/2/hi/business/7362343.stm

Other factors that affect supply of cotton:

Biofuel -- Although effects of biofuel are largely associated with a rise in food prices, the greater amounts of land set aside for sowing Biofuel crops reduces the amount of land available for growth of cotton. Some farmers are also switching from planting cotton to biofuel crops to accomodate growing demand of biofuel producers. This switch by farmers in type of crop sowed is also indicative that current biofuel producers are earning supernormal profits, hence attracting other firms to join in the industry.

Charles