Cotton is an industry in decline. For approximately two centuries, cotton benefited from industrialization, population growth and income growth to drive consumption higher. However, two centuries of an upward trend has come to an end unless structural changes in cotton’s competitive situation are made.
At the time of the invention of the cotton saw gin in the 1790s, world production of cotton for commercial use was probably only about 2,000 tons of lint. (Commercial producers are distinct from what may have been millions of households producing yarn and fabric by hand for own-consumption using cotton harvested from wild plants or garden-like crops.) By the start of the civil war in the United States in 1861, world cotton production had climbed to about one million tons, and by the mid-1930s, prior to the start of World War II, world cotton use had reached about 4 million tons per year. Between the end of World War II and 2007, world cotton consumption climbed to 26.6 million tons. However, eight years later in 2015, despite population growth of 8% or 600 million, and world real GDP growth of 18% since 2007, world cotton consumption was still 2.9 million tons, or 11%, less than it was at its peak.
In the Age of Sail, all lines and sails on ships were made of natural fibers, mostly hemp and sisal for ropes, and linen for sails, and millions of tons of each fiber were produced each year. As late as the 1960s, world hemp production was still nearly 400,000 tons per year, sisal production totaled 750,000 tons per year, and flax fiber production used to make linen fabric totaled about 700,000 tons. Today, with the exception of museums, all ships’ lines and sails are made of nylon, polypropylene or polyester, and world production of hemp has fallen to less than 60,000 tons, sisal production has fallen to less than 300,000 tons, most of which is used in agricultural twines and cordage, and world linen production is estimated at 300,000 tons.
Prior to the advent of “fast fashion” and “casual Fridays,” wool was a major apparel fiber. In the 1960s, wool accounted for 10% of world apparel fiber use, and production for all uses including carpets reached 1.8 million tons, clean basis, in the early 1990s. Today, wool accounts for 1% of world fiber use, and production has fallen to 1.2 million tons. Just as with wool and other natural fibers, the world may realize years from now that Peak Cotton has passed.
The Role of China
The primary reason for cotton’s decline is the growth of polyester production, combined with the operation of the Chinese State Reserve. World production of polyester climbed from 5 million tons in 1980 to 9 million by 1990, to 19 million by 2000 and then to 37 million in 2010 and 50 million tons this year. Production of polyester in China has increased from about 10% of the world total in 1990 to about 70% today, and as shown by Ethridge, “Policy-Driven Causes for Cotton’s Decreasing Market Share of Fibres,” this growth is a direct result of policy choices in China.
In addition to promoting polyester production, the Government of China maintains a strategic reserve of cotton, serving as a national buffer stock. China releases cotton to the domestic market from the reserve through a system of auctions when there is a shortage, and replenishes the reserve in times of abundance, thus supporting prices.
The result is that cotton consumption in China is being discouraged through a process of rationing associated with the operation of the State Reserve. At the same time, the same State Reserve withholds cotton from the world market, and therefore world cotton prices are being maintained above a level to which they would otherwise fall in competition with polyester.
Relative fiber prices are extremely important in determining fiber market shares. When introduced in the 1950s, prices of polyester were far higher than those of cotton, but prices of polyester reached parity with cotton in 1972 and have been correlated in the decades since. The most recent 8-year interval, from 2008 to 2015, has been brutal to the competitive interests of cotton. During this period, cotton prices have averaged 42 cents per kilogram more than prices of polyester, a premium of 26%.
High cotton prices are undermining the competitiveness of cotton relative to polyester. Since 2007, cotton’s share of world apparel fiber consumption has fallen from 38.4% to 27.6%, a staggering loss of market share of more than 10 percentage points. The volatility in cotton prices during 2008 and 2010/11, before China began building a state reserve in 2011, caused much demand destruction. Arguably however, China’s persistence in maintaining a state reserve at a time while polyester prices have fallen to less than 50 cents per pound in China is contributing to a continued slide in market share that now threatens the long term viability of cotton as an industry. It is not too strong a statement to say that the world cotton industry, and the welfare of millions of producers, is being held hostage to the intentions of the Government of China regarding industrial policies that promote polyester production and the cotton reserve that prevents cotton consumption.
As of 2016, 64 countries have biofuel mandates or targets for their domestic liquid fuel supplies. The mandates with the largest impacts are in the United States, the EU-27 and China. The U.S. government requires that 18 billion gallons of biofuel, primarily corn ethanol, be blended into the U.S. fuel supply during 2016, and approximately half of all the corn produced in the United States is devoted to biofuel production. In the EU-27, between 5% and 7.5% of liquid fuels must be composed of biofuels, and China hopes to reach a 10% biofuel share of the national fuel supply by 2020.
The result of the biofuel mandates is that prices of corn, and soybeans which are a substitute for corn in cattle rations, have moved structurally higher over the last decade. The U.S. average farm price for corn was $1.28 a bushel from the end of World War II to 1972/73 (a bushel of shelled corn is defined as 56 pounds or 25.4 kilograms). The average farm price rose to $2.36 through 2007/08, and since 2007/08 the average U.S. farm price has increased to $4.35. The structural increase in corn prices coincide with the announcement of biofuel mandates in 2007. Prices of soybeans have followed a similar pattern.
Meanwhile, the average level of the Cotlook A Index is the same today as it was during the 1970s, 1980s and 1990s, while costs of cotton production have been rising, while yields per hectare have been flat. As a result, with the prices of grains structurally higher while the price of cotton is the same as it has been for decades, farmers are exercising rational judgment and shifting land from cotton to grains where possible.
World cotton area has varied in a relatively narrow channel between 31 million hectares and 36 million hectares since 1950, with no trend either up or down. However, cotton is now at the bottom of that band, and with biofuel mandates encouraging shifts toward grain and oilseed production, cotton area may slip below 31 million hectares over the rest of this decade.
Can Cotton Unite? Will India Lead?
To avoid the fate that has befallen other natural fibers, the world cotton industry must unify to educate governments on the impacts of Chinese policies that promote production of manmade fibers while preventing the consumption of cotton. While cotton has many advantages over polyester, it must nevertheless compete with alternative fibers on the basis of price. No fiber, not even premium fibers such as wool and silk, much less cotton, can maintain demand for long if prices are uncompetitive. No matter what technical performance advantages a fiber may possess, nor how preferred by consumers, if the incentive to substitute becomes great enough, engineers and designers will find a way to utilize the cheaper fiber. Only India possesses the diplomatic and economic influence sufficient to lead a world effort to induce the Government of China to change its current mix of policy options that are proving so toxic to the interests of the cotton world.
To avoid the fate that has befallen other natural fibers, the world cotton industry must unify to standardize industry practices in order to improve efficiencies and promote consumption. The industry needs to adopt worldwide universal permanent bale identification tags (PBI) with barcodes linked to standardized instrument testing of cotton (SITC). The industry must adopt and actually enforce a zero-tolerance policy for contract defaults. The industry needs to move toward universal adoption of standardized bale sizes, densities and coverings. And, the industry must adopt best practices in field and gin hygiene to reduce contamination. As the largest cotton producer, only India possesses the diplomatic and economic influence sufficient to lead such a world effort.
To avoid the fate that has befallen other natural fibers, the world cotton industry must unify to advocate for technology acceptance among consumers and regulators. The denial of technology by NGOs and government agencies is contributing to the strangulation of the world cotton industry and the loss of competitiveness to polyester. In order to compete with polyester, cotton yields have to rise and the cost of production must fall; this is a fundamental reality of a competitive world economy in which consumers exercise choice based on fashion, fit, color, feel, price, availability and other factors. If cotton cannot supply market demands at prices consumers will pay, cotton will go the way of wool, linen, silk, ramie, hemp, sisal and other fibers whose markets were once measured in millions of tons and are now niche fibers.
It is technology that will enable yields to rise. It is technology that will enable farmers to produce more cotton with less resource use, thus lowering real costs and environmental impacts, and it is technology that will enable an improvement in intrinsic fiber quality parameters to meet consumer preferences. But, just as conservative politicians in the United States reject the science underlying global warming, so NGOs, thought leaders and regulators in the United States, and especially in Europe, reject the science underlying modern agricultural production technologies. As the largest cotton producer, only India possesses the diplomatic and economic influence sufficient to lead an effort to overcome the trend toward technology denial now building in the United States and Europe.
Will India Lead?
For approximately a century, since World War I, the United States has been the de facto trend setter, innovation developer and political leader of the cotton industry. However, the United States is now in decline within the world of cotton. With 2.8 million tons of production in 2015/16, the United States accounted for just 13% of the world total, the lowest proportion of world cotton production accounted for by the United States since the invention of the saw gin in the 1790s.
India is now the largest cotton producer, the second largest exporter, and within a few years India will be the largest producer of cotton textiles. With increases in economic power, will India have the political capacity, the judgment, the temperament and above all, the national will, to supplant the United States in leadership of the cotton world?