Monday, January 12, 2015

The Global Cotton Industry: A Look At Its Past With Insight Into Its Future

For many people, the term globalization only has significance as a label for business development over the past 25 years or so. In fact, globalization is nothing new and is typified by the cotton business. The rise of textiles, as the first rung of industrialization, the rise of textiles, particularly in 19th century Europe, would not have been possible without the globalized production of cotton in Africa, Asia, the Americas, and elsewhere. Cotton, so it seems, was an essential, if unassuming, raw material of not only textiles but world development as well.

Today cotton is so ubiquitous that it is hard to see it for what it is: one of mankinds great achievements, so declares Sven Beckert, a historian at Harvard University, in his newly published Empire of Cotton: A Global History. Even so, as Dr. Beckert elaborates, cotton is as familiar as it is unknown," a prescient observation when we consider the current state of the cotton industry. If youve ever wondered why the cotton business behaves as it does, I recommend reading this insightful history. Deeply researched, highly analytical, and well written, Dr. Beckert successfully relates the importance of cotton to the evolution of global capitalism. Indeed, the authors case rests on his observation that although a mundane commodity, cotton was essential to the development of the global textile industry. In so doing, the cotton industry helped to create the global networks necessary for expansion of global trade. Moreover, cotton proved to be a far more versatile raw material than other natural alternatives -- such as flax, wool, or silk -- which not only suffered from small supplies but limited application in various textile products.

As Dr. Beckert points out, the mercantilist economies of the 18th or 19th centuries would not have been possible were it not for the availability of cotton to the burgeoning textile industries of Europe -- particularly in England, by far the most important producer of textiles into the 20th century. Far-flung supply chains, along with eager supplies of capital made the merchant community the vanguard of an increasingly globalized world. By the time of the industrial revolution in 19th Century Europe, cotton supply chains were already well established in the United States, Brazil, India, Africa and Asia. Indeed, with the advent of high-speed spinning and weaving in the 19th century, those supply chains were only deepened to meet the needs of European industry. Cotton, as a result, became the essential raw material for what became the single most important manufacturing sector in the 19th century, textiles.

Pulling no punches, Dr. Beckert describes capitalism as an exploitive force in the development of the global economy, but cotton was an essential thread intertwined with the growth of global capitalism. Without a ready supply of fibers, the industrialization in England and elsewhere in Europe would not have been possible. From the standpoint of economic development, this was a good thing. Yet such development came with the horrifically negative cost of slavery (to grow cotton) and labor exploitation (to produce textiles), negatives that, although disdainful, contributed mightily to the success of capitalism and, by way of that success, the introduction of much of the world to modernity.

However, due to its importance as a raw material, producers and manufacturers of cotton yarn and fabrics enjoyed a level of political influence seldom enjoyed by any industry throughout history. This influence, though, resulted in abuses in the political, economic, and social development of the world, ultimately resulting in the manipulation of political influence, economies of scale, and, inexcusably, the exploitation and enslavement of large numbers of peoples in the American South and elsewhere. Slave labor, in turn, helped to support the wheels of industry, which provided the markets and capital necessary to support the overall system of supply and demand. With the advent of the industrial revolution, exploitation of factory workers took on sinister levels second only to the slaves picking cotton in the fields. Nevertheless, these evils enabled a rapidly developing Europe to meet its potential as the industrial powerhouse of the world by advent of the 20th century.

Saturday, October 25, 2014

A Funny Thing Happened On The Way Cotton's Demise: It Changed

There's been a lot of negative talk lately about cotton: how it's lost its mojo and fallen out favor with consumers. In todays market, cotton is challenged in significant ways as it has to compete with an oversupply of synthetic fibers, a fast evolving textile supply chain, and changing consumer attitudes toward natural fibers. Of course, cotton always has to contend with weather, insects, weeds, and other growing problems; farmers year in and year out face such production challenges. Even so, there's always the demand of the market that ultimately tells the story of the success or failure of a product. Over the past few years, it seems as though the textile supply chain and consumers prefer synthetics. Cotton has lost market share.

I've written several critical commentaries about the cotton business in various publications over the past few months. Much of my concern has centered on the lack of focus on the part of the industry to address inroads made by synthetics. Further, theres confusion in the market over cotton's message. The frankly fallacious campaign conducted by proponents of "green" production (at the expense of traditional growing practices) has only helped to undermine the benefits of cotton. However, I'd like to suggest that the opposite is beginning to happen: cotton has shown remarkable resilience in the face of an otherwise dour market.

Let me explain. For many years, U.S. exports of cotton struggled to find a consistent presence in the global market. Traditional U.S. cotton that is, cotton typically produced in the Southeast, short staple, of standard- or low-quality filled the needs of domestic open-end spinners. However, as that industry collapsed, sales to more competitive overseas mills fell as well. The first decade of this century was tough for many growers, as they not only lost much of their traditional customer base, but also lost much of the overseas market at the same time. Lack of demand for traditional U.S. cotton resulted in a series of smaller crops. Some farmers stayed with cotton, but many fled to other more profitable crops such as corn and soybeans. Despite the dismal market for cotton at the time, something unexpected happened: new varieties of cotton were developed to meet the demand of overseas mills.

The Global Market for Denim: Problems and Opportunities

The global denim business faces considerable pressures these days. The global recession of a few years ago has left a lasting impact on consumer spending. Expensive is out; cheap is in. Credit-fueled spending has given way to tight budgets as consumers continue to pay off their debts from the years leading up to the recession. As a result, sales of jeans in the United States, for example, have declined over the past several years, while the popularity of low-cost knitted athletic wear has gain considerable market share. There was once a time when the purchase of a pair of jeans for a young consumer became a prized possession. Today, that’s less the case, as smart phones and other gadgets compete with jeans for the attention of consumers. It is true that the extreme high end of the jeans market remains robust, but the mass market for denim around the world has stalled.

Another factor has also affected the denim market: synthetic fibers. In an effort to lower the cost of mass-market jeans production, many manufacturers have replaced cotton with some polyester. Stretch fibers have, of course, been a force in denim for many years. But since cotton prices soared to over $2/pound in 2011, both mills and apparel companies have scrambled to find more economically priced fibers for use in their denim. Of course, cotton prices have since moderated, but so has the price of polyester solidifying gains by synthetics.

So all of these factors add up to one thing: there’s an oversupply of denim worldwide. For sure, the jeans business is cyclical. Even so, skepticism plagues the market. Many retailers have told me that without question, denim has passed “the top of the cycle” right now. Due to anemic demand, and an increasing switch to blends, global denim prices are relatively weak. The overcapacity situation has further dampened price levels. It appears that demand will only fall over the next few years. Over that time, excess capacity will be shed around the globe. Yet, even though capacity will be reduced in aggregate around the world, some countries will actually step up construction of new mills.

In terms of trends, I foresee a continuing decline in aggregate denim capacity over the next few years as inefficient mills in Europe, North America and Asia are dismantled, while at the same time new capacity comes on-line in China, India, Turkey and Brazil. The growth in these countries and a smaller number of other producers, such as Vietnam, will in time grow to offset declines in less efficient capacity elsewhere. Indeed, the cyclical nature of the global denim business seems to indicate a cycle of approximately five years in length with capacity being added and deleted as fashion and other factors increase and decrease demand for basic denim.