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

Saturday, October 25, 2014

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 nature of the global textile industry has changed. Since the 1990s, high-speed open-end spinning was all the rage around the world, particularly in the Western Hemisphere and Europe. The technology allowed mills to produce decent yarns in vast quantities using only standard (meaning cheaper) varieties of cotton. But as the textile industries in those regions gave way to competition from Asia and elsewhere, older, slower spinning technologies found their way back into vogue. Lower labor costs helped to bring back ring spinning to produce high-quality yarns. Indeed, the industry in China, India, and South Asia, specifically, adopted ring spinning as a preferred means of production. With the use of that production, the demand for better quality cotton emerged. By its very nature, ring spinning requires stronger cotton, along with a longer staple, to reduce breakage while spinning yarns.

The result was increasing demand for quality cotton around the world including production in Africa, Australia, China, and the United States. In fact, in the case of the United States, a whole new classification of cotton developed in Texas, the Southwest, and parts of the Southeast. You may have heard of FiberMax® or PhytoGen®, for example, and such production gave ring spinners longer, stronger fiber but with significant attribute: cost competitiveness. Such production was not Pima, for sure, but this production did compete directly with varieties of cotton just below the quality standards of Pima, in particular California Acala. Indeed, Texas production soared to dominate domestic cotton production while California farmers shifted to other crops. Such cotton is often referred to as quality upland cotton and makes up a significant portion of U.S. cotton exports.

As has been widely reported, U.S. cotton production suffered from drought and other weather-related problems over the past few years resulting in a smaller crop. Ironically, these smaller crops followed price spikes in 2007 and 2008. This combination of factors helped to steer mills



and apparel companies toward synthetics, which not only enjoyed price advantages but a more consistent supply of the product. More recently, however, the largest importer of U.S. cotton, China, pulled back on its imports for a number of reasons. First, China cut back on imports due to large warehouse supplies purchased in previous years. Second, the government reoriented grower policies to favor food crops. Third, textile capacity sifted out of China into other countries to help offset rising labor and production rates. Moreover, Chinas reduced importation of foreign cotton began to affect adversely U.S. exports beginning on 2013, only to become more severe in 2014. While China cut back on its imports of cotton from the U.S. and elsewhere, other textile-producing countries stepped in to fill some of the void. Significantly, this shift is most apparent in U.S. exports of quality upland cotton. In fact, were it not for quality upland, the overall decline in U.S. cotton exports would have been far worse than it is even now. It is a bright spot in an otherwise gloomy picture.

U.S. exports of quality upland cotton to China and to the rest of the world (other than China) follows different trajectories. For the year-to-date August 2014 compared to the same period in 2013, U.S. exports of quality upland cotton to China are down more than 50% while exports to the rest of the world up by 6.5%! So it appears that U.S. export results may not be so bad after all, at least when it comes to quality upland cotton.

There’s more. When we take prices into consideration, the results are striking. The U.S. dollar has been strong this year, so prices paid at by mills have gone up for all varieties. Hence, quality upland maintains its market outside of China even thought prices are up for the year. Some of you may ask: aren’t futures prices for cotton are down? That’s true, but the prices quoted in the Census data are based on real prices charged in the past. Futures prices, on the other hand, are just that: they are prices for delivery in the future and do not take currency fluctuations into consideration.




Then there are the countries most responsible for the export results. The top 12 export destinations (countries that make up at least 1% of U.S. exports) for quality upland cotton amounted to nearly 95% of total world exports, which makes the market somewhat concentrated. So only about 5% of exports are shipped to the rest of the world. For the time being, China will not be active in the world markets as a major buyer of foreign cotton, at least at the levels in which the world has become accustomed. So any trade analysis should compare China to all other buying countries. So, if we exclude China, which accounts for about a third of U.S. quality upland cotton exports, the next 11 largest export markets comprise more than 60% of world exports. For sourcing executives, it’s a familiar list of countries. After China, the largest market so far in 2014 is Turkey, followed by Vietnam, Indonesia, Korea, Thailand, Peru Taiwan, Bangladesh, Pakistan, India, and Mexico. Indeed, eight of these 11 countries have imported more quality upland cotton this year than last. These countries represent some of the major producers of cotton textiles and apparel, with huge exports to the U.S. and E.U. It is a significant correlation. What will be interesting to see is if China reenters the global markets for cotton later this year after the U.S. harvest. If China reenters the global market for quality upland cotton, then for fortunes for U.S. exports will improve dramatically.


U.S. Exports of Quality Upland Cotton







Top Markets Greater Than 1% of Exports to the World





480-Lb Bales




















ANNUAL

YTD AUGUST



COUNTRY
2010
2011
2012
2013

2013
2014
% chg
% total










China
1,523,189
2,109,927
2,690,538
2,661,820

2,285,398
1,082,164
-52.6%
31.2%
Turkey
737,059
787,460
405,198
807,326

638,858
864,438
35.3%
24.9%
Vietnam
116,544
213,794
195,077
432,010

374,257
198,863
-46.9%
5.7%
Indonesia
330,376
428,070
229,579
257,541

214,948
171,544
-20.2%
4.9%
Korea
110,508
317,193
144,257
221,775

180,722
227,634
26.0%
6.6%
Thailand
161,488
214,976
145,835
214,113

150,262
189,159
25.9%
5.5%
Peru
181,683
192,463
131,415
185,339

133,220
165,063
23.9%
4.8%
Taiwan
132,500
99,821
114,166
131,430

98,639
109,093
10.6%
3.1%
Bangladesh
131,022
230,485
68,417
105,274

87,753
92,775
5.7%
2.7%
Pakistan
140,853
245,290
100,764
98,331

91,545
29,754
-67.5%
1.0%
India
40,907
44,052
52,601
74,374

52,569
69,189
31.6%
2.0%
Mexico
606,028
214,925
149,198
70,139

42,308
81,263
92.1%
2.3%
Total Above
4,212,157
5,098,456
4,427,045
5,259,473

4,350,480
3,280,937
-24.6%
94.6%










Total Above Less China
2,688,968
2,988,529
1,736,507
2,597,653

2,065,082
2,198,773
6.5%
63.4%










Other
328,317
493,183
322,611
426,742

328,820
188,086
-42.8%
5.4%










WORLD TOTAL
4,540,474
5,591,639
4,749,656
5,686,215

4,679,300
3,469,022
-25.9%
100.0%










Source: U.S. Bureau of the Census









I’d like to suggest we’re entering an age of "New Cotton." Better quality and improved performance have become very important to mills and brands around the world. Certainly, price will always be important for any company, but demand for quality cotton has bucked the downward trend in cotton in general. Although my analysis has highlighted U.S. quality upland, there are competing varieties of cotton in China, India, Brazil, Australia, West Africa, and elsewhere. These origins have also enjoyed strong growth in an otherwise depressed market; further evidence that quality sells. For a mill or an apparel brand, quality raw materials can help to differentiate their products in a crowded and price-sensitive market. Not only will better raw materials help a company to produce better quality fabrics, shirts or pants, but it also will help to lower the cost of production of those products resulting from improved spinning efficiencies.

You may know the expression: “garbage in, garbage out.” I feel that the cotton industry has an answer for that: “quality cotton in, quality textiles out.”

------------------------

Notes: For this analysis, the following Schedule B classifications were used to tabulate U.S. exports of various types of cotton. The list provides the Schedule B number, followed by a summary description, and then a detailed description as provided by the Census Bureau:

Schedule B # 5201001025: Low quality (short staple) upland cotton.

COTTON; NOT CARDED OR COMBED: HAVING A STAPLE LENGTH UNDER 25.4 MM (1 INCH) OTHER THAN HARSH OR ROUGH

Schedule B # 5201001090: Traditional upland cotton.

COTTON; NOT CARDED OR COMBED: HAVING A STAPLE LENGTH UNDER 28.58MM AND OVER 25.4 MM (LESS THAN 1 1/8 INCHES BUT > 1 INCH)

Schedule B # 5201002030: Pima Cotton.

COTTON NOT CARDED OR COMBED, HAVING A STAPLE LENGTH 28.58 MM (1 1/8 INCHES) OR MORE, AMERICAN PIMA

Schedule B # 5201009000: Quality Upland Cotton.

COTTON NOT CARDED OR COMBED, HAVING A STAPLE LENGTH 28.58 MM (1 1/8 INCHES) OR MORE, EXCEPT AMERICAN PIMA

Source: U.S. Bureau of the Census, Schedule B classification system.

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