An Empirical Study of U.S. Cotton Price In Response to Market Shocks

Cotton has a long history as the main input for clothing for the past centuries. However, the emergence of “fossil” fibers has been widely applied to manufacture since the World War II, a new category of man-made fiber became a new product to substitute the natural fiber (plant-origin and animal-origin), as a result, a substantial reduction in cotton’s share in total fiber consumption was induced. Furthermore, cotton price in the international trade are affected by the macroeconomic shocks and shift in oil market. The price of artificial fibers declined sharply taking advantage of new developed technology in chemical fiber industry. Till now, cotton and polyester together account for about two thirds of global fiber consumption.

     Unlike other agricultural commodity, there are limited progress on cotton price model are established in this field in the past decades. Since the removal of ban of cotton price forecasting by USDA in 2008 Farm Bill simulate the update existing cotton price forecasting approaches and develop new empirical models. The instruments of forecast for agricultural price are important to both private and public policymakers, as well as producers and consumers of cotton.  In this paper, we analyze the effects of various factors underlying price determination to the shift in cotton market. The objective of this study was to investigate macroeconomic and oil shock to cotton price in international trade. The survey data collected the wide range from 1975 to 2009. Using VECM model and empirical price model analyze the effects of these factors. The result illustrates the response of cotton price to stock-to-use, production and export. This paper also explains the co-movement of oil and cotton price and the exchange rate and other factors.