Measuring the Impact of the 2007 U.S. Farm Bill on Future U.S. Acreage (Part 1 of 2)

Sunday, March 15, 2009

The Market vs. Government Policy:
Measuring the Impact of the 2007 U.S. Farm Bill on Future U.S. Acreage

Presentation made at the 2006 FiberMax Cotton Quality Summit, Singapore.

Transcribed by our friends at Cotton Bangladesh.

The topic to be discussed in this presentation is the U.S. Farm Bill in the context of global consumption of textiles. This type of government policy is directly affected by production and consumption but in some cases such government policy ignores market conditions. It, in turn, makes the market react in very hard ways. We will be looking at issues such as production, consumptions and trade. In the context of the Farm Bill, we will be looking at the implications for supply and demand in terms of the acreage going forward in the US market. There are many variables involved in that. I would like to conclude this article by highlighting on how the consumption element and the production are intricately inter-related. It is known that in the recent past, the supply chain has gone through enormous change. In the case of global cotton business, having easy access to quality cotton has become more important to understand how government policy, such as the US Farm Bill, can impact the increasing trend of cotton consumption.

At this point in time, I would like to identify 10 factors that effect the global textile consumption. It is really critical to understand how the US Farm Bill will interact with the global textile industry. The bottom line for everyone is what is the future for cotton prices and availability?

Factor 1: Global textile production has become highly concentrated in few countries.
Cotton is produced in a very small number of countries in the world. Same is the case for production of polyester fiber. At the same time, there is only of small number of countries engaged in apparel export business. However, during the period when quotas were in place, this number was relatively high.

Factor 2: Global textile consumption is concentrated in relatively few countries.
Asian mills consume the lion’s share of the world fiber. One major factor in this regard is the competitive nature of the industries throughout Asia. At the same time, there are fewer countries that are actually importing. China has become the net consumer of finished textile apparel product. There are fewer markets in the world with the ability or buying power to drive the global textile supply chain.

Factor 3: Overcapacity is rampant throughout the world.
A large segment of the US textile industry has been inefficient, resulting in plant closures. Throughout the world, many of the textile complexes had to go through similar types of consolidation in the wake of increased productivity and increased market share by China, India and other cutting edge suppliers. For example, if we look at Denim, one particular study shows that significant growth has taken place in Asia while significant reduction has occurred in North America, Europe and the Middle East.

Factor 4: Investment flows have shifted dramatically over the last few years.
Heavy concentration of investment in the textile industry has primarily gone in one region of the world throughout the 1990s. This has continued in this decade as well.

Factor 5: Growth in the global market for textiles is slowing.
There had been huge growth over the years, particularly since the 1950 in global textiles consumption. This growth was observed since the end of the Second World War. However, the rate of growth from year to year, from decade to decade is slowing down. I am not suggesting that there is a negative growth, but the pie is not getting as large as quickly as it did in the years soon after the Second World War. It means that there is less market access for less competitive suppliers to sell in. It means that there is more demand or pressure on the supply chain to be more competitive. This will favor a more competitive supplier. Hence we have had the kind of global shake as we have seen in textiles.

Factor 6: Exporters are increasingly driving each other out of market in order to compete.
Exporting countries are now attacking each other in the accessible markets, particularly in the US and Europe in the wake of elimination of bilateral textile quotas. China is rapidly taking a very large share of the US market. This is in all aspects of textiles and apparels such as yarn, fiber, fabrics etc. China, in a sense, is the real engine in the growth levels. The same is in the case of non-apparel home textile fabrics; China is taking away market share from other countries. China’s share in the US market is increasing significantly. At the same time, there is enough room for other exporters; as a result, less competitive exporters enter the market chain.

Factor 7: Supply chain dynamics are in flux.
There is heavy consolidation at the retail level. The ripple effect is quite profound. At the same time, with less and less companies at the retail level, there is going to be some interesting implications over the next 10 years in terms of what the pull through dynamics is going to be for prices. Recent example is the Federated-May Merger in the US. It is relevant for people in the cotton business (even for the growers) to understand what really is going on in the textile level. It is not going to be as simple as having some government program to allow you to ship into an environment where there is no on else. In fact, there will be less and less money available in the government support, pricing scheme etc.

Factor 8: Trade liberalization is having unforeseen consequences.
There is a degree of interaction of the MFA with the US Farm Bill. The global textile supply had been scattered to well over a 100 countries largely because of the quota system that was in place for 25 years. The quotas that were in place were growing faster than the market. There was an increased emphasis on sourcing products. Concurrently, under the Uruguay Round, external tariffs were cut. Therefore, the larger consuming countries in Europe and in the US were loosening up their market. At the same time, quotas were relatively large in size than the existing market. Thus, due to the degree of restriction, particularly during the last few years before the end of quotas, there was quite a lot of competition in the global market. What we see today is, China and India solidifying their position. This, however, owes mainly to the very generous quota system that has encouraged that type of development. But all these loosening have created a situation where prices are falling. The price pressure is really significant for textiles business. In order to compete in the US market, it requires far more price sensitivity, far more productivity than it what had been the case previously.

Factor 9: The impact of China
China already has a huge share in global textile capacity. China is approaching half of the global capacity in certain types of textiles machines. There has been an enormous yarn production in China. It is not surprising that China is starting to push in basic textiles. However, one interesting issue is, how fast will China become a net consumer of finished garments and finished textiles? One has to understand that as a country becomes more sophisticated, it gains more buying power. Projections from a particular study suggest that if some increase in the standard of living occurs, particularly in the rural areas in China, the situation will be very different. At that point of time, China will become the key market that people will increasingly look to support. This market will demand certain fiber quality standards. Projections also show that China will be a very dominant supplier through the end of this decade. Going into the next decade, China will face growing competition from other countries. However, for now, China will continue to expand its share in the US and European markets. This will happen despite the safeguard measures put in place. Statistics also show that China will have a very extensive export growth after 2015. From then on, things will be changing and we will see China as an importer of apparel. Textiles industry is a stepping stone industry. As living standards go up, China will move to higher value added industries. Textiles will become less and less important industry. Textile consumption, on the other hand, will become more essential as the buying power of the population goes up. Thus, there will be demand for textiles and quality clothing. There are going to be different types of hi-tech industries in China. Then, the game will change. Right now, China is probably the largest importer of fabrics in the world.

Factor 10: Impact of China’s emerging competitors
China’s capacity in Denim production has been going high throughout the decade. But this is also in the case of India. India has been able to put together a very sizeable effort in Denim business. Pakistan is also in the scene. The industry is becoming more sophisticated. At the same time, Brazil has similar opportunities to make movement. Vietnam is, at present, a big name in the business. The further we get away from 2005, the further we get into the next decade. That is where the shifts will begin to occur. Future competitors will probably be from Vietnam. The expansion of cotton business in Vietnam is likely to expand to Laos and Cambodia. As a result, some shifts will occur in import scenario for the developed countries like the US. Such shifts raise the need for discussion on issues like the US Farm Bill.

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