Cotton Industry Looks for Solutions to Problems of Supply and Risk Management -- and Introduces “Better Cotton Initiative”

Sunday, March 07, 2010

SINGAPORE, March 5, 2010 -- At the second and final day of the Singapore 2010 International Cotton Conference, a professional cadre of speakers addressed difficult problems facing the industry, ranging from the marketing and packaging of cotton to risk management, and to the effects rapidly growing Asian economies will have on global consumption.

Illuminating presentations were made on the markets in China, India, Indonesia and Bangladesh. China and India represent two of the largest producers and consumers of cotton globally, while Indonesia and Bangladesh represent two of largest regional consumers of cotton. All four countries boast the largest and most competitive textile complexes globally, but in China and India cotton production takes on more significance as major contributors to both economies.

Nevertheless, several speakers suggested that China’s run as the unchallenged leader in textile exporting may have passed, while at the same time suggesting that India’s space in the queue has just moved up. Although careful to point out that China’s position as the leading producer of textiles is not in jeopardy of being eclipsed by another supplier any time soon, speakers identified developing trends offering new opportunities for Chinese producers to focus more on China’s burgeoning Middle Class, an increasing force in global consumption of textiles, rather than the debt-burdened consumers in the US, the traditional market for Chinese exports over the past two decades.

As a result, in the opinion of some speakers, China’s textile industry will increasingly focus more on domestic consumption of its products instead of simply exporting the bulk of its output, but by doing so allowing exporters in other countries, such as India, to increasingly step in to meet global demand. Factually, over the past two years, textile exports from China to the world have declined, while domestic consumption has risen.

Yet despite the apparent opening created by shifts in demand for Chinese textiles, some speakers were critical of the Indian textile industry’s ability to take advantage of the changing market citing an over-reliance on government support programs that has hindered rather than helped India’s textile industry to reach its potential -- placing the industry at least ten years behind their Chinese counterparts.

One thing is certain: How these countries cope with the supply and demand issues affecting cotton will likely tell the story for textile mills and consumers around the world for decades to come. Because of the growing importance of the Asian textile industry and its consumption of cotton, risk management will take on a particularly important role in the coming years. Already globally most cotton merchandisers hedge their cost of cotton, some growers do as well, not to mention many textile mills, but traditional risk managements techniques have proven to be inadequate as was witness in the dramatic run up and crash of cotton prices in March 2008.

The soaring run up and dismal crash of cotton prices in 2008 was a continuing theme at the conference. Clearly, no one wants to get caught in the same mess again, if possible. To help address this, an excellent overview of textile risk management was made by Mr. Jagdish Parihar, Managing Director of Singapore-based Olam International, a leading trader of commodities globally. In his speech, Mr. Padihar made the point that it in not enough to simply put on hedges to control risks for textile mills, but rather mill directors need to determine risk all throughout their pipeline beginning with cotton but also including yarn and fabric inventories.

Although all of the topics discussed at the conference were interesting and quite informative, I was particularly interested in a discussion of sustainable cotton production. In light of global debate over organic cotton, sustainability is a practical method of producing cotton not only more efficiently, but also with far less environmental impact than exhibited by traditional growing techniques.

In support of sustainable production, Brazil-based Mr. Antonio Esteve, Cotton CEO of Ecom Agroindustrial Group, a leading global merchandiser of cotton, made a most interesting presentation. During his presentation, Mr. Esteve discussed a relatively new program called the “Better Cotton Initiative,” a program that began in 2006 at the behest of some major retail brands, including IKEA, Levi’s and Marks & Spencer.

Until now, this program has received relatively short shrift in the media, but it has the potential to be the logical successor to the organic cotton movement. As I’ve belabored in this blog and on Twitter, organic cotton suffers from severe limitations in that true organic production is hard to certify in a unified manner across the globe and suffers from low yields and high prices -- with the result that certifiable organic cotton makes up only about 0.8% of all cotton produced around the world.

I believe that most growers and consumers of cotton would like their cotton to be made with as little harm to the environment as possible. The Better Cotton Initiative is not a certification program -- you may not necessarily see a hang tag on your clothing labeled “Made of 100% Better Cotton,” but rather this program is a set of procedures providing the guidance necessary for growers to produce cotton requiring less water and pesticides than in the past. But unlike organic cotton, which at least on one level tries to be what it isn’t, the Better Cotton Initiative is what it is: a good faith effort to incorporate the best attributes of an organic program along with the realities of growing cotton today.

If you want to learn more about the Better Cotton Initiative, please click HERE.

Details on the Singapore ICA Conference, along with a list of speakers and attendees may be found HERE.

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