According to Vietnam Cotton Association, the world cotton market witness fluctuating cotton price with many ups and downs. The continued cotton price increase in the first quarter of 2011 with the short supply both force companies to buy cotton with the highest ever price in the cotton production industry history.
The price jumped to 5 dollars a kilogram from 2-3 dollars a kilogram. Meanwhile, the cotton price dropped dramatically in the second quarter; this, plus the fact that companies could not sell fiber have led to a lot of consequences. Some enterprises had to cut down production to ease the stocks, while others had to break contracts, accepting loses which may lead to the bankruptcy.
Vu Huy Dong, General Director of Dam San Fibre Textile Company, said that the companies in the field couldn’t arrange their production plan quickly due to the unexpected sharp price fluctuation. Dam San incurred a big loss since it imported cotton at high prices and sold products at the time when cotton prices decreased.
With such heavy fluctuation, no businesses could avoid losses in the period from April to November, because the cotton price drop dramatically from 5 dollars when enterprises order the imported to 3.9 dollars per kilo, while the imports arrive the storehouses. After fulfilling the orders, the cotton price drop further to 2.5 dollars per kilo. As a result, lucky enterprises incurred the loss of 1-3 billion dollars, while unlucky ones incurred the loss of 7-8 billion dollars.
According to Dong, the domestic cotton supply can only satisfy 2 percent of demand from domestic textile companies, while the other 98 percent must be met by imports. It takes 1.5-3 months to place orders and import cotton average. It takes 2-2.5 months to import cotton from East and West of Africa, 1-1.5 months to import cotton from America and India.
Therefore, only the companies, which can plan their cotton import and production well, can avoid risk. In principal, according to Dong, enterprises can minimize their loss by taking insurance policy for the cotton price fluctuation. However, this cannot be done in Vietnam. Dong thinks that as for the contracts in which the letter of credit (LC) has not been opened, textile companies should negotiate with the importers to obtain the best prices which are the mixture of the old and the new prices.
Jonathan Devine, from the US Cotton Association, said that the cotton price has dropped sharply to 2.4-2.5 dollars per kilo, suggesting that it is the right time for textile companies to buy cotton to serve their production plan for 2012.
The US Agriculture Department has estimated that by the end of 2011-2012, cotton crop 2.9 million parcels of cotton would be added into the world stock. The factor could push up the downward trend of the cotton price. There are many reasons that make people believe that the cotton price would not increase sharply in 2012: the lower demand and the economic difficulties in big markets such as the US, Japan and Europe.
Le Tien Truong, Deputy Chair of the Vietnam Textile and Apparel Association (Vinatas) said that it is necessary to draw lessons from the situation in 2011. Truong said that in the long term, Vietnam needs to control the cotton supply instead of relying on imports by developing the cotton growing areas.