Effect of Lower Energy Costs on Cotton Consumption

The outlook for global cotton consumption will certainly be influenced by any potential changes to world economic growth (as measured by gross domestic product, or GDP).   During the fall of 2014, the outlook for world economic growth was being scaled back by influential forecasters such as the International Monetary Fund.   However, in December of 2014 the price of oil began to decline sharply, as did the retail price of gasoline.    This has led to speculation that economic growth might be stimulated, and/or that consumers would have more disposable income to spend on things like apparel.  The argument has been made recently at the Beltwide conference, on the Ag Market Network, and in other venues.

So will a drop in gasoline and oil prices lead to a boost in cotton consumption (and hence higher cotton prices?)   The answer is sometimes, yes, but it’s complicated.  Looking at the two charts below you can see times when higher gasoline price (Figure 1, red line) or oil prices (Figure 2, red line) are associated with lower cotton consumption (the blue line).  Those charts show that the relationship between energy costs and cotton consumption is not consistent.  The clearest interpretation from Figure 2 is that when oil price increases are large enough to cause a recession (see 1978-1981), then cotton consumption clearly declines as a result of the recession.  This interpretation jibes with demand models of cotton that include world GDP as an independent variable.

One study (p. 32) did find evidence that consumer spending on clothing is negatively related to energy prices.  The size and duration of the effects differed by different categories of clothing, e.g., men’s, women’s and infant clothing.  Importantly, these effects were symmetrical, meaning that the same effect of higher energy prices should work in reverse, i.e., lower energy prices should stimulate expenditures on apparel.

The above citation appears to support the assertion that recent declines in oil and gasoline prices might induce more cotton consumption.  But it is more complicated, still.  Lower oil prices would also make competing fibers like polyester cheaper.  So even if consumers are buying more apparel, they may not be consuming that much more cotton, at least compared to a few as they would have a few years ago.   In addition, there may be other influential factors that are keeping consumers from buying as much apparel as the above citation would predict.  Evidence for this lack of retail buying is currently being reported in the business press.

As for the ultimate effect on cotton prices, the evidence is also mixed.  A time series analysis of oil market shocks and cotton price variability only shows a relationship when the change in oil price is due to changing global demand for commodities.  In the chart below, this may explain the instance during 2006-2007 when oil prices and cotton consumption (and cotton price, too) all rose together.  There is no statistical relationship between supply-driven oil price variability and cotton price variability.


Figure 1.  Overlay of the average annual U.S. price of gasoline with the per capita world consumption of cotton.










Figure 2.  Overlay of the average annual U.S. price of crude oil with per capita world consumption of cotton.



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