- The document provides a history of cotton production and processing from fields to fabrics. It discusses key cotton producing and consuming countries and factors that affect cotton quality and pricing.
- International cotton merchants play an important role in buying cotton from producers and selling to consumers. They manage price risks, logistics, quality control, and contracts.
- Sustainability and traceability are increasingly important issues. Technology and data are transforming the cotton supply chain. The role of merchants may need to evolve to add more value beyond basic commodities trading.
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Concise independent analysis from Innovation Forum about how brands are responding to the sustainable and ethical cotton sourcing agenda. Also covers their partnerships with NGOs and engagement with farmers and the supply chain, in detail.
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The peer-reviewed International Journal of Engineering Inventions (IJEI) is started with a mission to encourage contribution to research in Science and Technology. Encourage and motivate researchers in challenging areas of Sciences and Technology.
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Fashion industry always had a very short shelf life and the commodities always look up for renovation.
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Fashion industry always had a very short shelf life and the commodities always look up for renovation.
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2. A Brief History of Cotton
• Egypt (3500 years ago) first accredited with growing
cotton
• India Circa 450 BC - “trees growing wild which produce a
kind of wool better than sheep’s wool in beauty and
quality and which the Indians use for making their
clothes”
• Jamaica - Sea Island Cotton – 1730
• UK circa 1740’s – First mechanized spinning mills
• USA 1793 – Invention of the cotton gin by Eli Whitney
• UK 1841 – Creation of the Liverpool Cotton Association
• USA 1870 – New York Cotton Futures Exchange
3. The Processing of Cotton from Field to Fabric
Cotton Field in Northern Mexico
4. The Processing of Cotton from Field to Fabric
(courtesy of Barnhardt Manufacturing Company website)
5. The Processing of Cotton from Field to Fabric
Cotton Gin in Northern Mexico
6. The Processing of Cotton from Field to Fabric
Cotton Gin in Northern Mexico
8. The Processing of Cotton from Field to Fabric
Cotton bales in Togo, West Africa
9. The Processing of Cotton from Field to Fabric
• Unlike other commodities the supply chain in cotton is
fairly long and fragmented - so there are many processes,
different price points and potential bottlenecks
• Farming
• Ginning
• Merchant
• Textile Mill – vertical & non vertical
• Dyeing, Knitting, Weaving, cutting, sewing
• Retailers & Brands
• End consumer
10. Different Qualities of Cotton
• Different qualities are used for different end products
with completely different pricing
• A merchant will generally guarantee the following 4
main quality specifications :
1. Grade and Colour
2. Staple length
3. Micronaire (fineness and maturity)
4. Strength
11. Different Qualities of Cotton
• HVI Machines (High Velocity Instruments) have generally
replaced manual classing - HVI results can show
additional quality parameters guaranteed by the
merchant.
12. Different Qualities of Cotton
• Low grade cotton would be used for denim for example
(don't need to absorb dye uniformly) 50 to 60 cents per
lb - High grade cotton would be used for better quality
garments 70-80 cents per lb.
• ELS cotton such as Egypt and California PIMA would be
used for home textiles and super expensive designer
clothes 110 to 140 cents per lb.
• The most expensive cotton in the world is Indian SUVIN
GOLD of which there is only 2000 bales produced per
annum on one farm in South India and it all goes to
Japan.
13. Key Factors affecting Quality & Price
• Weather
• Farming Techniques
• Large sophisticated mechanized farms : Brazil, USA,
Australia
• Small holder less sophisticated manual labour farms :
India, Africa, Pakistan
• Machine Picked versus Hand Picked
• Ginning techniques
• Storage Facilities
14. Balance Sheet for Global Supply and Demand
• Cotton is a truly International commodity, produced and
consumed all around the world but there are only a few
true powerhouses …..
• STATISTICS STATISTICS STATISTICS !!
• There are 3 main bodies who issue statistics and to which
the Merchant Community pays the most attention
• Cotton Outlook based in Liverpool UK
• ICAC (International Cotton Advisory Committee) based in
Washington DC USA
• USDA (United States Department Of Agriculture) based in
Washington DC USA
15. Key numbers in the Global Balance Sheet
2019/20 (USDA Feb 2020 Report)
• Beginning Stocks: 80 million bales
• World Production: 121 million bales
• World Consumption: 119 million bales
• International Trade: 43 million bales
• Ending Stocks: 82 million bales
16. Top 5 Cotton Producers
(courtesy of the USDA Feb 2020 Report)
• Top 5 represent 96 million bales or 79% of global
production
India China USA Brazil Pakistan
0.00
5.00
10.00
15.00
20.00
25.00
30.00
29.50
27.25
20.00
12.70
6.60
Million Bales
17. Yields of the Top 5 Producers
We can see a huge difference in the average production
yields between the top 5 producers
• Brazil: 1800 (Kgs seed cotton per hectare)
• Australia: 1800
• China: 1700
• USA: 955
• Pakistan: 725
• India: 500
18. Top 6 Cotton Consumers
(courtesy of the USDA Feb 2020 Report)
• Top 6 represent 94.10 million bales or 78% of world
consumption
• Consumption in Europe and USA has migrated to Asia during
the last 20 years
China
India
Pakistan
Bangladesh
Turkey
Vietnan
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00 37.50
24.50
10.80
7.30 7.20 6.80
Millon Bales
19. Top 5 Cotton Exporters
(courtesy of the USDA Feb 2020 Report)
• Top 5 represent 36.20 million bales or 84% of
international trade
USA Brazil W. Africa India Ctr.Asia
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00 16.50
8.90
5.60
3.60
1.60
Million Bales
20. Top 6 Cotton Importers
(courtesy of the USDA Feb 2020 Report)
• Top 6 represent 33.85 million bales or 79% of
International Trade
China
Bangladesh
Vietnan
Pakistan
Turkey
Indonesia
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00 8.50
7.20
6.80
4.20 4.10
3.05
Million Bales
21. The Main International Cotton Merchants
The function of the traditional cotton merchant is to buy
when the producer wants to sell and sell when the
consumer wants to buy
It is a highly competitive business. A few examples of the
largest Merchants handling more than 1 million bales each
1) Louis Dreyfus
2) Olam
3) Cargill
4) ECOM
5) Glencore
6) Reinhart
22. International Cotton Merchants (cont’d)
• A few examples of Medium to Smaller merchants:
DEVCOT / CDI / FAIRCOT / TOYO AND
TOYOSHIMA / ICT / OTTO STADTLANDER / USA
COOPS / INDIAN TRADERS / NAMOI
• Rise of the Chinese State Trading Organizations:
CNCGC
COFCO
23. The Role of an International Cotton Merchant
• The principles of moving a commodity from A to B are
the same whether it be a bale of cotton, a bushel of
corn or a bag of rice
• In simple terms : Buy, hold, sell and ship ......
• Buy from a producer - on call or fixed price – inspect
quality – arrange delivery - crop financing and barter
trade
• Sell to a consumer - on call or fixed price - quality
(modern mills can't spin claims) - delivery (just in time)
24. The Role of an International Cotton Merchant
• Spot or forward contracts - analyzing counter party risk
is an integral part of the merchant function
• Logistics & Trade Terms : Ex gin, ex warehouse, FOB,
FOT, FOR, C&F, CIF, delivered Mill
• Price risk management - hedging and basis trading (buy
high sell low) - hedging with futures or options (delta
hedging and the Greeks, delta, gamma, theta) - flat
price trading - market positions - basis positions -
managing calendar spreads - exchange arbitrages -
quality arbitrages - import/export arbitrages - daily P&l
reports - value at risk - forward books
25. The Role of an International Cotton Merchant
• It is the USA which drives International cotton prices. Its
the worlds largest exporter, it has the only truly liquid
International Futures hedging exchange in New York
• The USA has a very complicated Farm program designed
to support cotton farmers
• Certificated Stocks impacting the calendar spreads -
cannot tender non USA cotton against the board -
Equities - Loan deficiency payments - Abandonment
insurance
26. The Role of an International Cotton Merchant
• Managing the impact of Indian MSP / China Strategic
Reserve / Trade Wars
• Booking freight - break bulk and charter party
agreements BEFORE - NOW containers (can be huge
rate fluctuations depending on trade flows) - hedging
fuel prices - hedging vessel availability (Baltic Exchange)
- its almost a trade book on its own since its the second
biggest cost after the commodity itself – local cross
border trade requires trucking expertise such as USA to
Mexico or India to Pakistan and Bangladesh
27. The Role of an International Cotton Merchant
• Managing purchase and sale agents - cotton is very
agency driven
• The role of International Controllers - SGS, Wakefield,
Bureau Veritas, Intertek - inspecting weights and quality
- NCSW, NLWF
• Payment : Letters of credit / CAD / COA / advance
payments (National Bank of Uzbekistan Guarantee)
• Marine Insurance - typically 0.25% of the invoice value
28. The Role of an International Cotton Merchant
• Warehousing - ability to carry - Brazilian bale yards
which insurance underwriters actually prefer - Indian
warehouses they don't like so higher deductible
• Contract terms will incorporate all of the above
• In the event of a dispute ICA R/A
29. Some of the Changes Currently Impacting
Traditional Cotton Merchandizing
• Speculator funds
• Index funds
• Algorithmic Traders
• HFT's
• Inverted Markets
• Fundamentals versus Technical
• Government Intervention Policies
• Increasing counterparty risk
• Competing Fibres
• Diminishing margins, rising costs, increasing risks
30. Traceability & Sustainability
• Fast Fashion
• Social and Environmental Impact
• Water and Pesticides
• Provenance: Product DNA and proprietary
traceability schemes
• Important role of the NGO’s
• BCI / CMIA
• GOTS Organic Cotton
• Certification bodies
• United Nations 17 Sustainable Development
Goals (SDG’s)
31. How Sustainability is Impacting the Investment
World and beyond
Investors are increasingly integrating sustainability into
their investment decisions. SRI (socially responsible
investing) will continue to increase. 26% of total global
assets under management are already under SRI
vehicles representing 23 trillion dollars today up from
13 trillion dollars in 2012
Increasing international social and environmental
regulations will have a direct impact on Textile supply
chains and especially the Fast Fashion business model
32. How Sustainability is Impacting the Investment
World and beyond
What does this mean?
• It means that Corporations around the world will
have to pursue more aggressive ESG Strategies
(Environmental, Social and Governance) if they are
to maintain value and raise funding from the capital
markets. The Morgan Stanley Emerging Market ESG
Index has outperformed the plain vanilla Emerging
Market Index by 4500 basis since 2018
33. How Sustainability is Impacting the Investment
World and beyond
More and more investors and stakeholders are going to
look for Sustainability qualities and this should
eventually have a healthy impact on the supply chain
and particularly the income and livelihood of
subsistence farmers and textile mill workers around the
world
The younger generation are demanding a change of
environment and we can expect to see a paradigm shift
in consumer preferences and purchasing habits
34. How Technology is Impacting the Supply Chain
(a few examples)
• Emergence of new Agtech companies
• Online trading – potentially bringing producer and
consumer closer together
• Satellite imagery improving crop husbandry - improving
overall agronomy - allowing for more prudent crop
financing
• Improved seeds and seed treatment improving yields -
microbial technology
35. How Technology is Impacting the Supply Chain
(a few examples)
• Online freight booking
• DNA sequencing - true traceability
• Big data - helps producers and consumers
• Digitization of documents
• Blockchain
• Greater transparency more accountability
36. Looking forward
• Traditional cotton merchandizing business will continue
to see its margins under pressure unless merchants can
find a way to add greater value - its not enough
anymore to just buy, hold, sell and ship ...…
• Technology will continue to be disruptive
• Sustainability strategies will become the levers of
change as to how business is done
