The Modern Cotton Chain Is Out of Balance

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The global economy is still affected by the financial crisis of 2008/09. Consumers have no confidence and the market is in the doldrums.

In addition, rising energy and material costs have greatly impacted manufacturers in recent years. Manufacturing costs are increasing and profits are decreasing. It is a difficult time for the processing industry.

Minimizing Energy Costs and Usage

To help its member respond to these changes and their impact, the Taiwan Spinners’ Association holds workshops to teach its members about the latest in energy-saving technology. Spinners are trying to control all costs and improve their production efficiency.

My company, Tah Tong Textile, performs very well in the value-added category. We add thermo fiber in combed cotton yarn to make winter clothing warmer, and use cooler materials to make summer clothing feel cooler, properties which enhance the product value-added.

In the next few years, the market and material prices may remain uncertain and this situation will continue to have a big influence in the cotton industry. In order to revitalize the economy and reduce unemployment, some of the advanced industrial countries propose Quantitative Easing and lower interest policies.

But the concern is that non-manufacturing capital will flood into the futures market, resulting in dramatic changes in the next few years, as we have experienced recently. The basic cotton trading transactions are mostly based on the futures index prices.

Cotton users in many countries, especially ones in Asia such as Taiwan, rely on 100% raw cotton imports. It takes approximately 45-70 days from placing the order to receiving the delivery in the warehouse.

To illustrate this, imagine that the New York futures price is 83 cents and the purchasing spot price is 95 cents today. When the cotton goods arrive a month or more after placing the order, the New York futures price drops to 75 cents while the purchasing spot price becomes 88 cents.

This results of a 7-cent spread and a 20.5-cent increase in cost per kilogram for combed yarn, decreasing the margin about 5%.

In the cotton industry today, the value chain has become a out of balance. The consumer market is still sluggish in the aftermath of the financial crisis.

In such an unstable, uncertain environment, finding a way to succeed in the future is like trying to catch fish during a storm – not only unpleasant, but also unlikely to succeed.

A Challenging New Environment

Today’s manufacturing environment has changed and lost many of its competitive advantages. We must find ways to manage the production costs or enhance the product’s value-added by changing production platforms.

To balance the cotton industry supply chain, the upstream and downstream should work together and take into account mutual interests. Below are three ways that could come to be:

Governments should cooperate with international organizations such as the International textile Manufacturing Federation, International Cotton Advisory Committee and other cotton associations to establish a system to promote cotton identity, packaging, and testing standards that can be used as the industry-wide system for evaluation and trade transaction.

We need the support of governments to cooperate with cotton industry associations and certification bodies to enhance cotton’s image – that of a more comfortable, natural fiber, that is both convenient and healthy – to retail consumers.

In the case of cotton price fluctuations, the business operations of both the buyers and sellers in the cotton industry chain are highly impacted. That makes it necessary to prevent speculators’ from having too much of an impact on the futures markets.

The New York futures market system has been in existence for more than a century, with the main function to hedge the risk of unpredictable and dangerous price fluctuations for the cotton industry chain on the market.

To ensure it remains viable and fulfills its role in the future, governments and industry experts need to build a sound system to prevent excessive speculative trading.

Chen is Chairman of Tah Tong Textile.

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