Six Factors Shaping the Global Cotton Trade Now and In the Future

The first factor is the end of the US cotton surplus. That constant hangover of the cotton industry as we know it is on its way down to zero. And once it approaches nil, the party is over. The US Farm Bill of 2000 ushered in an era of over-production backed by needless subsidies. As a result, the world has had a supply cushion for the better part of eight years. During this time, mills have become comfortable knowing that supply shocks would have limited impact because US oversupply meant a reliable supply. A likely outcome is that the US cotton’s historic role as a residual supplier to the world market may very well diminish as stocks erode, putting foreign mills in a pinch each spring after exportable supplies in the rest of the world have been deleted. Globecot estimates that the ever present US surplus will be gone by the end of 2010.

A second factor is the worldwide battle for acreage: Food versus fiber. Again, the backdrop was set against a massive oversupply except in this case stocks have already been drawn down to near zero. Here, the major factors at play include the rise of India and China; an increasingly better off global population; promotion of ethanol and biofuels; climate change and growing water shortages. Cotton must now compete for acreage in several key producing countries. This time around, however, acreage is being determined by economics and not government policy. For example, in the US Globecot forecasts corn and soybeans profit per acre in the coming 2009/2010 marketing year at 435 and 528 US dollars per acre, respectively, while cotton is right at 200 US dollars per acre. Under this scenario who would plant cotton in the US? It’s not just the US, either. In Brazil, the same marketing year has corn and soybeans profit per acre pegged at 365 and 156 US dollars per acre while cotton is still lower at 141 US dollars per acre. At current price levels there is very little incentive to plant cotton and it is highly unlikely that cotton could buy back this acreage anytime soon.

A third and perhaps more ominous factor changing the cotton trade is a projected sharp decline in Central Asian production. The underlying factors accelerating this continued reduction are a combination of mismanagement, environmental neglect and lack of investment in infrastructure. Most of these factors trace their origin to the days of Soviet mismanagement. Even recently, cotton has been little more than a foreign exchange generator, always produced and sold regardless of the market price. In recent years, cotton has taken a backseat as former Soviet republics have turned their attention to higher-priced exports such as energy and metals. Both China and Bangladesh have been big users of Central Asian cotton as a result of proximity and favorable transit times. It will not be easy to replace such a large block of cotton and textile industries located in countries dependent on Central Asian cotton should take note.

A fourth factor shaping the world’s cotton trade is the growing importance of India. This is no understatement considering in a few short years India has become the world’s second-largest producer of cotton, the world’s second-largest consumer of cotton, and the world’s second-largest exporter of cotton. In the not-so-distant future, India will be the world’s largest producer of cotton, the world’s largest exporter of cotton, and be home to the world’s second largest domestic market for textiles and apparel offtake.

A fifth factor shaping the cotton trade is the overcapacity burdening the global textile industry. The world simply has excess production capacity, particularly in synthetics. This condition is a result of massive over-investment into the textile industries of China, India, Vietnam and other Asian countries. Currently, global yarn prices lag behind the upward movement of cotton prices. As a result, spinners continue to face tight margins resulting from oversupply and too little demand. In China, for example, roughly two-thirds of textile mills are operating under a less than one percent margin. What this translates to is a major shakeout of inefficient producers. In China, this was underway until the government caved in to textile industry pressure and increased the textile export rebate. The move is strictly a short-term solution to a long-term problem. What the government didn’t say is that they still want a major consolidation of the industry and those not operating profitably shut down. Regardless, the next few years will see tepid growth in cotton consumption but more attractive margins and improved profitability will return to yarn spinning by 2010 to 2011.

A sixth and final factor shaping the world’s cotton trade is the fact that the US, Japan and Europe are no longer the center of the world. For the better part of 25 years, global cotton consumption at the retail level has been driven by the US, European and Japanese consumer. These markets are now reaching the saturation point, coupled by already-full closets, slower population growth, and an aging populace—the latter two factors are especially true in Europe and Japan. The consumer markets of the future and in turn the drivers for a vibrant cotton trade are the BRIC economies (Brazil, Russia, India, & China), along with much of Eastern Europe and rapidly developing smaller markets in Southeast Asia and the oil-driven markets along the Persian Gulf.