On Feb. 24, 2022, the world woke up to find Russia had launched a large-scale military invasion of Ukraine. Global markets went into a tailspin, particularly in the energy sector, but what does this mean for U.S. cotton?
The grain complex saw a hike in prices, according to Jeff Thompson with Autauga Quality Cotton. Ukraine is the fifth largest exporter of wheat while Russia exports 20% of the world’s corn.
However, little impact is expected on the cotton crop. Russia only imports 125,000 bales annually, and Russian retail is responsible for a mere 3.2% of the world’s cotton consumption.
So, how will cotton be affected? Inflation.
ENERGY
Russia is the third-largest producer of petroleum in the world. According to the American Fuel and Petrochemical Manufacturers trade association, the U.S. imported an average of 209,000 barrels of crude oil and 500,000 barrels of other petroleum products per day last year.
While the U.S. has not sanctioned Russian oil, traders are avoiding it; therefore, fuel prices are expected to rise.
FOOD
Fertilizer prices have already increased because of shipping and logistics issues tied to the pandemic, but now the increased prices on natural gas — a key production input — are adding to the problem, said Elizabeth Elkin with Bloomberg Businessweek.
Since Russia — who exported $55.5 billion worth of natural gas in 2021 — invaded Ukraine, these prices may rise even higher.
“No other nation has the same breadth of readily exportable fertilizer supply,” said Alexis Maxwell, an analyst with Bloomberg’s fertilizer analysis and news publication “Green Markets.”
The U.S. Department of Agriculture’s 2022 food price inflation forecast showed increased food prices as expected, according to Jim Wiesemeyer, with ProFarmer. USDA expects food price inflation in 2022 to be from 2.5% to 3.5% based on the Consumer Price Index. Rates may rise higher if geopolitical tensions escalate further.
“There’s two sides to the impact on cotton,” said Darren Hudson, Ph.D., Professor and Larry Combest Endowed Chair for Agricultural Competitiveness at Texas Tech University. “On one side, prices are moving in favor of grains, which will affect producers’ planting intentions going forward. And on the input side, costs continue to rise.”
As far as planting, the High Plains region won’t change much, Hudson added. “We may see more sorghum, but the climate doesn’t support a lot of corn up here.”
Spending habits will change, too. As prices increase, consumers may postpone purchasing nonessential items, like apparel, which can impact the textile trade.
However, up to this point, cotton exports show no sign of weakening demand. Exports were down 6% from the previous week, but up 14% from the prior fourweek average, according to USDA. Net sales were up 41% from the previous week and up 51% from the prior four-week average.
So, where to from here?
“Suffice it to say, markets often overreact negatively to such black swan events,” Thompson said. “Once viewed in a calmer manner, the situation often appears less bleak. It’s too early to hit the panic button. Nonetheless, the window of opportunity is closing as world consumption of 124 million bales comes into question here soon.”