Cotton - Experimenting Commodities

Cotton

This is a Work-in-Progress about Cotton Market (started in Feb '17). Secondary data was used. Information was collected from the Internet (I just compiled them).

I will mainly look at the Cotton Market from Porter's Five Forces Model along with some additional factors.

Introduction: Cotton: Cotton is a soft, fluffy staple fiber that is almost pure cellulose. The plant is a shrub native to tropical and subtropical regions around the world, including the Americas, Africa, and India. The greatest diversity of wild cotton species is found in Mexico, followed by Australia and Africa.

The fiber is most often spun into yarn or thread and used to make a soft, breathable textile. The use of cotton for fabric is known to date to prehistoric times. Although cultivated since antiquity, it was the invention of the cotton gin that lowered the cost of production that led to its widespread use, and it is the most widely used natural fiber cloth in clothing today.

Current estimates for world production are about 25 million tonnes or 110 million bales annually, accounting for 2.5% of the world's arable land. China is the world's largest producer of cotton, but most of this is used domestically. The United States has been the largest exporter for many years. In the United States, cotton is usually measured in bales, which measure approximately 0.48 cubic meters (17 cubic feet) and weigh 226.8 kilograms (500 pounds).

Types of Cotton: There are four commercially grown species of cotton, all domesticated in antiquity:

·         Gossypium hirsutum – upland cotton, native to Central America, Mexico, the Caribbean and southern Florida (90% of world production)

·         Gossypium barbadense – known as extra-long staple cotton, native to tropical South America (8% of world production)

·         Gossypium arboreum – tree cotton, native to India and Pakistan (less than 2%)

·         Gossypium herbaceum – Levant cotton, native to southern Africa and the Arabian Peninsula (less than 2%)

Cultivation: Successful cultivation of cotton requires a long frost-free period, plenty of sunshine, and a moderate rainfall, usually from 60 to 120 cm (24 to 47 in). Soils usually need to be fairly heavy, although the level of nutrients does not need to be exceptional. In general, these conditions are met within the seasonally dry tropics and subtropics in the Northern and Southern hemispheres, but a large proportion of the cotton grown today is cultivated in areas with less rainfall that obtain the water from irrigation. Production of the crop for a given year usually starts soon after harvesting the preceding autumn.

Cotton is naturally a perennial but is grown as an annual to help control pests. Planting time in spring in the Northern hemisphere varies from the beginning of February to the beginning of June. The area of the United States known as the South Plains is the largest contiguous cotton-growing region in the world. While dryland (non-irrigated) cotton is successfully grown in this region, consistent yields are only produced with heavy reliance on irrigation water drawn from the Ogallala Aquifer. Since cotton is somewhat salt and drought tolerant, this makes it an attractive crop for arid and semiarid regions. As water resources get tighter around the world, economies that rely on it face difficulties and conflict, as well as potential environmental problems. For example, improper cropping and irrigation practices have led to desertification in areas of Uzbekistan, where cotton is a major export. In the days of the Soviet Union, the Aral Sea was tapped for agricultural irrigation, largely of cotton, and now salination is widespread.

Genetic modification: Genetically modified (GM) cotton was developed to reduce the heavy reliance on pesticides. The bacterium Bacillus thuringiensis (Bt) naturally produces a chemical harmful only to a small fraction of insects, most notably the larvae of moths and butterflies, beetles, and flies, and harmless to other forms of life. The gene coding for Bt toxin has been inserted into cotton, causing cotton, called Bt cotton, to produce this natural insecticide in its tissues. In many regions, the main pests in commercial cotton are lepidopteran larvae, which are killed by the Bt protein in the transgenic cotton they eat. This eliminates the need to use large amounts of broad-spectrum insecticides to kill lepidopteran pests (some of which have developed pyrethroid resistance). This spares natural insect predators in the farm ecology and further contributes to noninsecticide pest management.

But Bt cotton is ineffective against many cotton pests, however, such as plant bugs, stink bugs, and aphids; depending on circumstances it may still be desirable to use insecticides against these. A 2006 study done by Cornell researchers, the Center for Chinese Agricultural Policy and the Chinese Academy of Science on Bt cotton farming in China found that after seven years these secondary pests that were normally controlled by pesticide had increased, necessitating the use of pesticides at similar levels to non-Bt cotton and causing less profit for farmers because of the extra expense of GM seeds.

However, a 2009 study by the Chinese Academy of Sciences, Stanford University and Rutgers University refuted this. They concluded that the GM cotton effectively controlled bollworm. The secondary pests were mostly miridae (plant bugs) whose increase was related to local temperature and rainfall and only continued to increase in half the villages studied. Moreover, the increase in insecticide use for the control of these secondary insects was far smaller than the reduction in total insecticide use due to Bt cotton adoption. A 2012 Chinese study concluded that Bt cotton halved the use of pesticides and doubled the level of ladybirds, lacewings and spiders. The International Service for the Acquisition of Agri-biotech Applications (ISAAA) said that, worldwide, GM cotton was planted on an area of 25 million hectares in 2011. This was 69% of the worldwide total area planted in cotton.

GM cotton acreage in India grew at a rapid rate, increasing from 50,000 hectares in 2002 to 10.6 million hectares in 2011. The total cotton area in India was 12.1 million hectares in 2011, so GM cotton was grown on 88% of the cotton area. This made India the country with the largest area of GM cotton in the world. A long-term study on the economic impacts of Bt cotton in India, published in the Journal PNAS in 2012, showed that Bt cotton has increased yields, profits, and living standards of smallholder farmers. The U.S. GM cotton crop was 4.0 million hectares in 2011 the second largest area in the world, the Chinese GM cotton crop was third largest by area with 3.9 million hectares and Pakistan had the fourth largest GM cotton crop area of 2.6 million hectares in 2011. The initial introduction of GM cotton proved to be a success in Australia – the yields were equivalent to the non-transgenic varieties and the crop used much less pesticide to produce (85% reduction). The subsequent introduction of a second variety of GM cotton led to increases in GM cotton production until 95% of the Australian cotton crop was GM in 2009 making Australia the country with the fifth largest GM cotton crop in the world. Other GM cotton growing countries in 2011 were Argentina, Myanmar, Burkina Faso, Brazil, Mexico, Colombia, South Africa and Costa Rica.

Cotton has been genetically modified for resistance to glyphosate a broad-spectrum herbicide discovered by Monsanto which also sells some of the Bt cotton seeds to farmers. There are also a number of other cotton seed companies selling GM cotton around the world. About 62% of the GM cotton grown from 1996 to 2011 was insect resistant, 24% stacked product and 14% herbicide resistant.

Cotton has gossypol, a toxin that makes it inedible. However, scientists have silenced the gene that produces the toxin, making it a potential food crop.

Organic production: Organic cotton is generally understood as cotton from plants not genetically modified and that is certified to be grown without the use of any synthetic agricultural chemicals, such as fertilizers or pesticides. Its production also promotes and enhances biodiversity and biological cycles. In the United States, organic cotton plantations are required to enforce the National Organic Program (NOP). This institution determines the allowed practices for pest control, growing, fertilizing, and handling of organic crops.

After the introduction, let us look at the major factors affecting Cotton Industry.

Porter's Five Forces Model:

Along with these variables, I will also explore a few other variables from PESTEL like Political, Environmental and Technological Issues.

Threat of Substitutes:

Competition from synthetic fibers: The era of manufactured fibers began with the development of rayon in France in the 1890s. Rayon is derived from a natural cellulose and cannot be considered synthetic, but requires extensive processing in a manufacturing process, and led the less expensive replacement of more naturally derived materials. A succession of new synthetic fibers were introduced by the chemicals industry in the following decades. Acetate in fiber form was developed in 1924. Nylon, the first fiber synthesized entirely from petrochemicals, was introduced as a sewing thread by DuPont in 1936, followed by DuPont's acrylic in 1944. Some garments were created from fabrics based on these fibers, such as women's hosiery from nylon, but it was not until the introduction of polyester into the fiber marketplace in the early 1950s that the market for cotton came under threat. The rapid uptake of polyester garments in the 1960s caused economic hardship in cotton-exporting economies, especially in Central American countries, such as Nicaragua, where cotton production had boomed tenfold between 1950 and 1965 with the advent of cheap chemical pesticides. Cotton production recovered in the 1970s, but crashed to pre-1960 levels in the early 1990s.

Since the beginning of 2015/16, cotton prices relative to polyester prices have been higher than any time since 2011, despite declining in absolute terms. In January 2016, cotton relative to polyester rose to a level previously only observed during the cotton price shock of 2010/11, and before that in 1977. The January 1977 cotton/polyester ratio of 1.564 was marginally above the January 2016 ratio, but the corresponding A Index that year was 89 cents/lb., compared with 69 cents/lb. in 2016, indicative of the substantial structural change in world fiber and agricultural markets during the intervening years.

Inflation-adjusted prices of agricultural commodities and man-made fibers have been falling for decades, driven down by continued technical innovation. In the last decade, the effect has been more pronounced for polyester than for cotton, and cotton’s share of world fiber consumption fell virtually every year between 2007 and 2014 as relative cotton prices rose. Marketing year 2015/16 saw a particularly sharp decrease in polyester prices, as well as in prices for petroleum and most other commodities. Monthly real polyester prices during 2015 moved with an 88 percent correlation with the U.S. Federal Reserve Board’s broad real exchange rate index, while cotton’s correlation was only 18 percent, and the A Index actually rose between January 2015 and January 2016. Real appreciation of the dollar is expected to continue—albeit more slowly—through mid-2016, suggesting polyester prices could continue weakening, and little if any improvement in the cotton/polyester price ratio can be expected for 2016/17 compared 2015/16.

Experts are projecting that Cotton market Share will decline in the future . . .

To be continued . . .