A statistical model to forecast season averages of international cotton prices has been identified by the ICAC Secretariat. The 2007 model explains 88% of the annual variation since 1975 in the Cotlook A Index, an indicator of international prices.
The 2007 model succeeds an earlier model first developed in 1988 and revised several times. The 2007 model will assist the Secretariat in developing improved forecasts of cotton prices.
A report detailing the econometric work and data used in developing the ICAC 2007 Price Model is available at ICAC website and is being published in the July/August issue of COTTON: Review of the World Situation.
Net trade in cotton by China (Mainland) was used as an explanatory variable in the 1988 ICAC model, and as imports by China (Mainland) rose in recent seasons, the prices indicated by the model were substantially above realistic levels in 2005/06 and 2006/07.
The 2007 model relates changes in the Cotlook A Index to changes in the stocks-to-mill use ratio in the “World-less-China” and to past changes in the stocks-to-mill use ratio in the “World-less-China” and “China”. Splitting the world into two regions (“China” and “World-less-China”) provides better explanatory power than considering the world as one region.
According to the 2007 model, a 5% increase in the stocks-to-mill use ratio in the World-less-China results in a decrease of 4.9% in the season-average Cotlook A Index during the same season.
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