In Love With Luxury: Consumers Drive ELS Sales
January 27, 2009 By most accounts, the extra-long staple (ELS) cotton market is doing fantastic so far this year. China had a record ELS crop, and sales from Egypt and the U.S. have already outpaced the combined sales of last year’s crop. Supima continues its promotional efforts for American Pima, which indirectly raises awareness for all high quality cottons, and consumers in the U.S., Europe and Japan are demanding household textiles and luxury apparel goods made from ELS fibers.
Area planted to this high-quality cotton in the three largest ELS-producing countries – U.S., Egypt and China – will be down this year, which could cause a spike in prices. At the same time, the U.S. continues toward a recession and some analysts wonder what impact this could have on consumer demand. Luxury goods usually perform better than average goods during economic downturns, but a severe economic slowdown could have an adverse effect on the market.
But right now, ELS sales are enjoying success, with good sales, firm prices and consumer demand strong. Matt Laughlin, marketing manager of J.G. Boswell Company in California, which is the largest producer of American Pima, said in February that combined ELS sales for U.S. and Egypt were already ahead of last year and that trend would continue throughout the marketing year.
“You really have to be impressed with the demand for ELS cotton. In mid-February, between U.S. and Egypt, we have just shy of 1.1 million bales registered for export. We only averaged 1.2 million bales during the last 5 years between the two of us. We are halfway through the marketing year, and we are at 1.1 million,” Laughlin said.
“We aren’t going to do 2 million bales, but the point is that the demand has been there for extra-long staple cotton. Even with China’s crop the way it is, we’ve managed to reach a million bales already between Egypt and the United States.”
Ernie Schroeder Jr., CEO of Jess Smith & Sons, said his firm has seen great demand for ELS fiber from international spinners and thinks that will continue. As demand usurps supply, prices could begin to take off, and he believes ELS price could see upward movement later in the year.
“ELS sales have been phenomenal. Great demand, good weekly sales. Price has been firm, but we think price is going higher because of the cutbacks on new crop ELS in U.S., Egypt and China. A lot of buyers are looking and realizing that now,” Schroeder said.
“The U.S. crop is already 90% sold out, and we have been advising a lot of our customers to stock up now. With 90% of the crop sold, 8 months until the new crop, and we’ve got cutbacks at production across the board, mills need to look at buying now. We don’t see demand slacking off, so prices should start working higher.”
Production Ups and Down
ELS production has been growing in recent years, most notably in China. In three years, China has more than doubled its ELS production, and industry experts say last year’s crop reached a record level. Like all cotton supply data in China, there is always a question with specific numbers, but the impact of the enormous increase cannot be overlooked.
“Supply has been growing more rapidly as a result of the rapid increase of ELS production in China,” said Jesse Curlee, president of Supima. “China’s production has gone from 367,000 bales in 2005 to 811,000 bales last season – more than double in just three years. For some reason China has been on an ELS planting frenzy, even though they supposedly have large unsold stocks of ELS cotton.”
The trend of higher production may not continue in 2008. California, which produces 90% of the American Pima crop, is expected to be down, primarily due to lack of water for irrigation. In times when water is regulated, irrigation goes to higher input crops such as vegetables and fruits.
“The water situation is still a serious situation, and California Pima acres are going to be down to around 200,000 (from 260,000 in 2007), and some people think lower. The interesting thing is that it is going to be down in a year when I think it would otherwise be up,” Laughlin said.
“We are coming off of the highest yields ever, some very good quality and price is pretty strong. It’s not great, but pretty good. And demand of course is very good as well. But despite all of these positives, California will still cut Pima acreage sharply, which shows you that water is the driving force in this situation.”
Production will also be down globally. While there is growing demand for ELS, Curlee said “industry experts are reporting China will finally reduce planting this season. We are hearing the same from Egypt, so the three leading producers of ELS cotton will be reducing planting this season.”
Price on the Rise?
With this scenario of higher demand and lower production for next year, ELS prices could be poised for a bull run next year. However, this could impact demand from global mills – if ELS prices get too high, mills have to pass that cost to their customers – or look for alternative raw materials.
“To me, ELS is inelastic, in that if you go up too high, then you cut off consumption,” said Mark Costa, CEO of White Gold. “We have been above $1.30 (USD) out in California a few years ago, and it rapidly dropped back down to a $1.00. But I think a price between $1.00 to $1.15 can be absorbed by the mills and passed on the consumer.”
If those costs can’t be passed down, international mills will seek replacement cottons that offer similar (albeit not as good) fiber characteristics at a lower price. American Pima could be substituted or blended with Chinese ELS or roller-ginned Acala from the Southwest U.S. But the possibilities of using these alternatives also help keep prices in check, giving mills a bargaining chip when negotiating price.
“In the past, the thing that U.S. Pima enjoyed was that there weren’t that many alternatives. Even if it got to certain levels, mills had to buy U.S. Pima for their quality products, but now they have several alternatives,” Schroeder said.
“China went from being a smaller producer to as much or maybe more than the U.S. produces. Then you have roller-ginned Acala which a lot of mills buy to lower their production costs. I think these alternatives are what is helping to keep the price from skyrocketing at the moment.”
Of course, mills that participate in the Supima branding program must purchase American Pima. As this program continues to grow – there are already 60 licensees in China, 33 in India, and 19 in Pakistan – then American Pima will have an advantage over other ELS-producing countries. So far, it is already keeping American Pima in overseas mills, in spite of larger crops in China. “China has been the No. 1 Pima importer for the last 3 years; even with their ample supply they are buying a lot of American Pima because they have a lot of the Supima-branded programs. This year they are already over 110,000 bales, even in the face of their record ELS crop,” Laughlin said.
Outlook is Positive
For the remaining months of 2007/08 and looking to 2008/09, American Pima and global ELS should see continued strong demand and increased prices. Mills may slow purchases as prices rise, but overall demand should remain steady and sales will continue. According to those close to the industry, global ELS, and specifically American Pima, will be strong in the face of any potential market challenges.
“To make a long story short, we think it is going to be a good year for U.S. Pima,” Schroeder said. “When we look at demand, sales, the ELS competitive program, Supima’s efforts, the markets – everything points higher. We don’t see any negatives in the U.S. Pima situation at this moment.”
Curlee agrees, but says the industry will need to keep a close eye on the U.S. economy and price ratios.
“Supima’s consumption forecast looks positive, and demand continues to be strong and growing. One has to be concerned about the U.S. economy – and therefore the world economy and a possible recession. Even though luxury goods normally do better than other goods during these cycles, there are concerns about the buying attitudes if a moderate to deep recession occurs,” Curlee said.
“Another factor is price of ELS goods. Commodity prices in general have seen a sharp rise over the last year or more, as Upland cotton has seen a 17 cent per pound price appreciation since the middle of last year. This has not occurred in ELS prices, but it would seem likely that ELS prices will also experience price increases. This will be necessary to retain their relative value position in the market and also to keep growers planting ELS cotton.”
Captions (3 photos):
Curlee
Costa
Schroeder
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