The Next Challenges: Synthetics and Price Discovery
February 9, 2011 The cotton market is, in my opinion, a “whole new game.” The industry as we knew it has changed forever and we have, in my estimation, entered a new paradigm.
Many people believe that the current high price of cotton will lead to huge plantings and a consequent decline in cotton prices in coming years. I do believe that was the old system but I am not certain that it is where we are today. Time will tell.
The emergence of Bt seed created an oversupply of cotton that has taken 10 years to match consumption levels. This resulted in very low prices, very consistent prices, and very little investment in the industry itself.
There is no new Bt “surge of adrenaline” on the horizon. Fiber consumption is growing at a rate of 3 percent per year. China no longer has the luxury of a reserve stock that will stabilize prices. The world consumes 120 million bales of cotton and if everybody were to consume as the Americans do, the world would consume 480 million bales of cotton.
Every Chinese person born after the year 1980 is considered the equivalent of the American consumer. The middle classes in both China and India are growing rapidly and likely will continue to grow for quite some time.
Cotton’s share of the fiber market as a whole will continue to decline. When I started in this business, it was 58 percent of the fiber market; today it is 35 percent and decreasing. It will become more of a luxury item and will be priced accordingly. The trend to increase the use of man-made fiber is significantly in place, especially in China, which has about 4 million tons coming onstream over the next few years. It remains to be seen whether synthetics will be successful in the face of a middle class that has previously viewed cotton as a status symbol. The deflationary trend in textile prices has, to my mind, changed for the foreseeable future.
The next task: price discovery for cotton
Another issue that deserves serious consideration is the price discovery for raw cotton. The current futures market only allows delivery of U.S. cotton, which in itself does not constitute enough volume to properly price global cotton. And the Chinese market now dictates to the Intercontinental Exchange market, which in turn dictates to the “A” Index. A proper global futures market with multi-delivery growths is, in my opinion, the only way to achieve proper price discovery in the wave of increased involvement from the speculative community.
The industry will move more and more towards sustainability/traceability/transparency. For as long as I can remember, the traceability of the supply chain has stopped at the fabric producer. Retailers and brands will not allow this to happen any longer and will want control over the entire supply chain in order not to face such charges as child labor/water usage, which are all too often propounded by large non-governmental organizations in ignorance of the facts.
Single-commodity companies are likely to decline in numbers as consolidation occurs across the commodity industry and economies of scale are created. Trading, while still important, will give ground to origination.
Those who can adapt and change with this will survive and prosper. Those who do not will continue to ensure the rationalization of our great industry.
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