Shifting Interests

By James Capell Nunn|July 26, 2010

Over the past few years we have seen dramatic changes in the cotton industry. Apart from currency issues in the Far East and cheaper goods from imports than actual business from U.S. retailers, we have seen the entire balance of the U.S. cotton business shift from a domestic business to an export business.

Not only did some textile mills become bankrupt earlier this decade, but it has also taken a major toll on how merchants and cooperatives do business. This also affects what happens in the fields among growers and how they conduct their business with today’s economy severely affecting the farming industry’s infrastructure.

From a U.S. merchandiser’s perspective, perhaps the biggest change has been the transformation of the industry to an export-based industry rather than a domestic textile industry, with textile exports being a secondary target rather than primary destination. All that is left in this practice is how non-U.S.-based mills fulfill their contractual obligations, especially in instances of dramatic declines by cotton futures, as was the case most recently in the fourth quarter of 2008. Along with these changes, Chinese market share has grown enormously with a greater focus now directed towards China’s consumption, imports and the export of finished goods. Along with the departure of several U.S.-based merchants in recent years, Asian-based merchandising firms have assumed a larger role. Fundamentals become a primary mover in how the industry affects the global market. This plays a huge factor on the amount of cotton being exported.

With the emergence of China as the world’s major textile player, changes in exports have severely affected the infrastructure of the industry. With that comes major volatility in production. For example, as India is becoming a strong competitor, it has started to take advantage of many policy issues. Within the past year alone, India has fluctuated its policies concerning trade. Most notably, it executed an export ban, making it illegal for Indian exporters to conduct their business. These practices have severely affected transportation costs and ocean freight rates. Chief Economist of the National Cotton Council Gary Adams recognizes this practice as a small part in how the business has shifted in terms of direction. Actions such as this have affected the industry’s transformation drastically, as he recognizes the fact that only 10 years ago, 75% of the U.S. cotton was shipped to domestic textile mills. With the changes in infrastructure and transportation, however, over 75% of U.S. cotton is exported today.

This shift in the business has also made growers more aware of the international market. While the futures market has seen strong price rebound in the last year, the price of cotton has been affected severely due to the present state of the economy. Therefore, growers have become dependent upon export business more than ever, and growers have to recognize that the cooperatives and merchants that handle the bulk of the exports are affected the most. Many farmers maintain contact with their buyers in hopes that the buyers remain in business to market their crops when prices rebound. While farmers have more alternatives in how they can handle their crops, many of them still do what they can to stay in business.