Long Run Trends and Fluctuations In Cotton Prices

One revelation from the 2008 Global Financial Crisis was the fragility of models and assumptions based on samples too short to include periods of high volatility, and this study attempts to remedy that short-coming for USDA’s development of long run cotton price projections. Real cotton prices have fallen significantly since 1900, but statistical verification of the presence of a long-run downward trend has proven elusive. Cotton price volatility has varied widely over the last 226 years, largely correlated with macroeconomic instability. Cotton’s period of greatest instability—during the U.S. Civil War—was primarily driven by cotton-specific trade and production disruptions, but since the Civil War, cotton volatility has largely coincided with broader commodity price volatility. One of cotton’s most volatility\e episodes since 18th century occurred over 2009-12, and was in part a consequence of nearly unprecedented macroeconomic instability and, in part due to factors specific to cotton markets. Looking ahead, cotton price volatility over 2018-27 is likely to be greater than the volatility experienced during 2016-17, when volatility was unusually low, likely reduced by China’s large sales from its National Reserve.