In the Age of Sail, all lines on ships were made of natural fibers, mostly hemp and sisal, and millions of tons of both fibers were produced each year. As late as the 1960s, world hemp production was still nearly 400,000 tons per year and sisal production still totaled 750,000 tons per year. Today, with the exception of museum ships, all ships’ lines are made of nylon, polypropylene or polyester, and world production of hemp has fallen to less than 60,000 tons while sisal production has fallen to less than 300,000 tons, most of which is used in agricultural twines and cordage.
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 wool production for all uses including carpets reached 1.8 million tons in the early 1990s. Today, wool accounts for 1.2% of world apparel fiber use, and production has fallen to 1.1 million tons.
Prior to the invention of manmade fibers, all apparel fibers were natural, and in the 1800s and early 1900s, cotton probably accounted for 85% of world fiber use. However, with the development of nylon, rayon, polyester, and other manmade fibers, cotton’s share has fallen. In the 1960s, cotton still accounted for two-thirds of all apparel fiber use. By the 1980s, cotton’s share had fallen to half, and today, cotton’s share of world fiber consumption is less than 30%, and falling. World cotton consumption reached 26.6 million tons in 2007, but eight years later in 2015, despite population growth of 8% or 600 million, and cumulative world real GDP growth of 18%, world cotton consumption is still 2 million tons less than it was at its peak. Just as with sisal, wool and other natural fibers, the world may have passed peak use of cotton.
Impact of the China State Reserve
As reported by the International Cotton Advisory Committee (“Production and Trade Policies Affecting the Cotton Industry,” ICAC, December 2015), subsidies paid by all governments to the cotton sector, including direct support to production, border protection, crop insurance subsidies, and minimum support price mechanisms reached a record $10.4 billion in 2014/15, up from the previous record of $6.5 billion in 2013/14. Twelve countries provided subsidies in 2014/15, but of the 12, China alone accounted for 63% of the total. Further, of the subsidies and market interventions proffered by the 12 governments, only China is explicitly intervening in a manner that raises prices and thus undermines cotton consumption.
China maintains a state reserve containing more than half of all world stocks by restricting imports and auctioning only enough cotton to domestic users to offset domestic production. The result is that the Cotlook A Index has been maintained around 70 cents per pound for more than a year. While this is equal to the long run average, it remains well above the price of 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 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. Not all of the loss can be blamed on the cotton policies of China. Indeed, the volatility in cotton prices during 2008 and 2010/11, before China began building a state reserve in 2011, caused much demand destruction. Nevertheless, China’s persistence in maintaining a state reserve at a time while polyester prices have fallen to less than 45 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.
The modern cotton industry based on international trade in saw ginned upland cotton is approximately 200 years old, and over that time governments could intervene in markets, secure in the knowledge that no matter how much harm they did, the world cotton industry itself would recover. However, the loss of market share to polyester during the 21st century has been so rapid and so severe that cotton has reached a point of much greater vulnerability.
In decades past, government measures that distorted cotton production and trade or encouraged the use of polyester, and thus interfered with market prices, may have slowed the rate of increase in cotton use. Today such policies threaten to destroy cotton as an industry. In particular, the policy of the Government of China to stockpile cotton, thus restricting the amount of cotton available to the market, is undermining the world cotton industry by keeping prices above a level that would be competitive with polyester.
Historically, governments have negotiated reductions in barriers to trade in the World Trade Organization, as well as in regional and bilateral trade arrangements. The last decade has seen much progress in reducing distortions to cotton production and trade caused by government measures in the United States and Europe, but developing countries, including China and India, have shielded behind their poverty and have refused to acknowledge that their actions too can destroy markets and undermine incomes. The Government of India in particular, has led developing countries in claiming a special privilege from WTO disciplines to distort commodity markets to protect domestic producers.
Consequently, while developed countries have largely eliminated support programs that distort production and trade under pressure from WTO commitments, developing countries still impose export restrictions, support prices, and build stocks with impunity.
With the structure of the world cotton market having changed so that a majority of production and mill use is now in developing countries, it no longer makes sense for those same countries to claim an exemption from the disciplines of WTO membership to enable the continuation of policies that destroy markets, rather than building them. While the current cotton situation spotlights the adverse market impacts of the stocks policy of China, India shares in the responsibility for WTO rules that turn a blind eye to the harmful policies of developing countries. Cotton producers around the world would benefit from a change in the negotiating position of India in the WTO to favor the inclusion of developing countries in the same disciplines over commodity policies that apply to developed countries.