The challenges facing the global cotton industry and the outlook are expected to be the centerpiece of the 74th plenary meeting of the International Cotton Advisory Committee in India. The event will run from Dec. 6 to 11 in Mumbai. The theme of plenary, “From Farm to Fabric: The Many Faces of Cotton,” will cover mechanized picking, retailers’ views on cotton, international exchange of germplasm, sustainable production practices and use of cotton by-products.
José Sette, who took over as executive director of ICAC on Jan. 1, 2014, spoke to WWD about some of the issues he faces as cotton markets go through a sweeping change this year. Sette’s focus — to spur countries to work together on issues of international significance — becomes more important as cotton prices drop globally; as the governments of both China and India — the two largest producers of cotton — sit on huge cotton stockpiles, and as changing patterns of global demand and supply require more negotiating skills than ever before.
WWD: Is the global supply chain healthy for cotton? Are you concerned about it?
José Sette: One thing that was damaging for cotton was that we had a very sharp spike in prices four years ago. Prices have fallen since then, but the high volatility deterred buyers. The cotton supply chain is highly complex and diverse, and the agents in the supply chain are generally of a smaller size than in other commodities. In such a case, the volatility disrupts the supply chain more.
Some people were unable to honor their contracts, for one reason or another, and this had a knock-on effect, disrupting the entire supply chain. Since then, price volatility has been very low in the last few years because of the Chinese stock policy. But as prices fall now, and we do not know whether they will fall further or stabilize, this volatility may reappear. We have to work hard to strengthen the relationships between the various parts of the supply chain — to make it more predictable and to make sure that people fulfill and honor their commitments to other agents. Although this question is more related to the private sector and ICAC works primarily with governments, it is an issue that concerns governments because if it becomes too prevalent the whole supply chain can be affected. So this is something that we are keeping an eye on, and trying to assist the private sector in creating mechanisms for ensuring that people do fulfill their contracts.
WWD: But aren’t farmers the ones most affected by prices coming down?
J.S.: Prices in recent years for cotton have been much above their historical average. We should look at these past three or four years as a kind of opportunity for farmers, but it is not something that could last indefinitely. So they should be grateful for the good times in the past, but current price levels are much more in line with long-term trends.
WWD: What do you see as the important focus point for Indian cotton?
J.S.: I think the biggest challenge that India faces is to raise the cotton yield. Productivity in India is far below the world average, so the number of kilograms of cotton that are harvested per hectare can be increased. There are a lot of small landholders, which makes it hard to become more efficient. In addition, a lot of cotton production depends on rain-fed farming, and will vary with the weather. Despite that, there is a lot of room for improvement, whether it is related to finding new seed varieties, or other means.
Our next plenary meeting is being held in India. This will be an opportunity to work even closer with the Indian cotton sector and to showcase its strength and challenges.
WWD: Overall, has intervention by governments been helpful to improve the industry?
J.S.: The question of government intervention in markets and government support for prices is a very complex subject. On the one hand, we know that farmers are at the base of the supply chain and they are vulnerable and have a lot of fragility. On the other hand, whenever governments step in to support prices artificially and keep them at a high level this has other repercussions. We have seen this in the past three years in a very striking fashion. Not because of India, but almost entirely because of the policies that were followed in China, which pursued a policy of buying up cotton on a very large scale for three years. This has had adverse consequences for the rest of the world. It has supported prices globally, so farmers have enjoyed high incomes for this period, but — and it’s a big but — a huge stockpile has accumulated in China and this stockpile hangs over the world market. Meanwhile, the high prices have made cotton less competitive relative to competing man-made fibers, especially polyester.
So the demand for cotton has been really hurt in the last few years and the demand for cotton this year is still below what it was seven to eight years back. This is not a sign of a healthy market in the long run. We need there to be a demand for cotton to grow. Although there may be negative impacts for farmers, cotton prices must be competitive.
WWD: Looking ahead, how do you see the drop in cotton pricing fueling demand?
J.S.: It will depend on many factors. China has changed its policy so it is no longer buying up cotton on a massive scale, but it is subsidizing farmers in substantial amounts. Prices have fallen, and this leads other major producing countries to also step in and support their farmers, as is the case in India. The Indian government has been buying cotton this season, and there are other forms of support in countries such as Brazil and the U.S. A new factor is the drop in oil prices. Oil is the raw material for most of the man-made fibers that compete directly with cotton. Falling oil prices are limiting the increase in demand for cotton that we expected from lower cotton prices.
WWD: How do you see cotton demand and supply balancing out in the next few years?
J.S.: As an organization we look more at the picture as a whole and global production this growing season will be almost equal to demand. So the situation is not so bad as in the last four years when you had substantial overproduction.
We don’t know yet where prices of cotton will go over the next few years. Certainly now we have reached a point where they are much more competitive than they were in the last three years and we foresee that the demand will react. But it’s difficult to say how strong this move toward greater demand will be. We have to see another important factor — there is a massive overcapacity in the polyester sector, so that will tend to keep the prices of the competing fiber low, which prevents the demand for cotton really reacting at the pace that we would like to see. Demand is now in line with production, but we have to take into account the massive stock in China, which will overhang the market for years to come. We do not expect China to dispose of this stock in a disorderly way — it will probably be sold in a measured way — slowly.
WWD: How can India help itself and the world cotton situation, given that its production is going to be of more consequence this year?
J.S.: The Chinese policy of stockpiling cotton has led China to become the world’s largest importer of cotton and many countries directed their exports to China. Now China will be importing a much smaller volume of cotton, and countries such as India need to look to other markets for export. It is also true that other markets are growing, but not at a tremendously fast pace. That will make it hard for India to maintain the same export performance as in previous years. One of the ways India can help itself is by processing into yarn and fabric, adding value, and then exporting or selling the product on the Indian market. In per capita terms, the consumption of cotton on the Indian market is very low — there are limitations to how fast it can grow, because incomes in India are still low. But there are countries with similar income levels that consume more cotton than India. I think there is space to work the internal market in India so as to consume more cotton.
WWD: Do you see things changing in India, in terms of trading practices?
J.S.: Cotton quality from India is improving gradually over time. Practices after harvest have improved. For example, in the past cotton used to be unloaded onto dirt floors at the gins and now it is unloaded on concrete floors. There is much more awareness of the quality problems caused by contamination in cotton. The situation is better but there is still room for improvement.
WWD: There is still a passionate discussion/argument about the relevance of genetically modified cotton in India. Do these arguments transcend boundaries and become a concern for ICAC?
J.S.: ICAC does not distinguish between types of cotton. For us, conventional, biotech and organic cotton are all equally valid. Today, according to our estimates, Bt cotton accounts for almost 70 percent of world cotton production. In almost all cases where farmers have adopted Bt cotton they have continued to use it. Nobody is forcing farmers to use Bt cotton. They use it because they see economic advantages, especially in the form of the reduced care. For example, Bt cotton is more resistant to some pests and requires less pesticide. This trend is unlikely to change and it appears prevail all over the world — to grow more and more Bt cotton.
WWD: Are you concerned about the reports of farmer suicides related to cotton farming in India?
J.S.: We know suicides occur all over the world, every day, not just of farmers. But nobody has shown to me, to my satisfaction, that there are proportionally more suicides of cotton farmers than those who cultivate other crops and whether this is due to some perverse distribution of income in the supply chain or the cultivation of genetically modified seeds. I’m very reluctant to accept this type of anecdotal evidence when no scientific proof has been presented.