Feb 19, 2011
With cotton at record highs, one should revisit it's impact on Vietnam. On Nov 4 2010, I highlight:
In Vietnam, less then two percent of cotton demand is met by domestic production. Hence, Vietnam is dependent on cotton imports to supply the soaring manufacturing needs. Supply is currently provided from the US, which provides 50% of Vietnam’s cotton.
The dynamics of cotton in the US are similar to what is happening to cotton supply the world over. Cotton must compete with soybeans for hectares in the south and with corn in the midwest. As the price of corn has increased dramatically by ethanol-distillation demands, US farmers will favor corn in the Midwest during 2011. Meanwhile, the plantation space between soybeans and cotton is looking especially tight in the South. Investors should review their garment and textile holdings before farmer decisions for this winter’s soybean and cotton crops.
Putting this into context, I have found that soybean prices have led cotton prices by about four months. This implies that soybean influence overall planting decisions followed by cotton. If soybean prices remain high and the weak US dollar entices export demand, look for cotton prices to continue to increase during 2011. This will force Vietnamese garment and textile mills to attempt prices hikes to protect their already-small margins despite increased sales. It will be the stronger brands that can suppress margin erosion.