Global Cotton: Shifting Order To Create New Opportunities

The global cotton market is shifting from historical producers and consumers to new markets, which we believe will create new opportunities for retail companies and apparel manufacturers. We highlight below the main winners and losers of these changes.

Shifting Production Centres: From US/China To India/Pakistan

Out to the end of our forecast period in 2017/18, we forecast the combined share of global cotton production from the US and China, the world's largest producers, to decrease from 45.7% in 2012/13 to 40.6% in 2017/18. In contrast, India and Pakistan are forecast to increase their combined share of global production from 33.0% to 36.2% over the same period.

India Overtaking China
Select Countries - Cotton Production (as % of global)

The global cotton market is shifting from historical producers and consumers to new markets, which we believe will create new opportunities for retail companies and apparel manufacturers. We highlight below the main winners and losers of these changes.

Shifting Production Centres: From US/China To India/Pakistan

Out to the end of our forecast period in 2017/18, we forecast the combined share of global cotton production from the US and China, the world's largest producers, to decrease from 45.7% in 2012/13 to 40.6% in 2017/18. In contrast, India and Pakistan are forecast to increase their combined share of global production from 33.0% to 36.2% over the same period.

We expect production growth in the US and China to stall over the coming years. This will be the result of a reduction in government subsidies and a decrease in competitiveness for both industries. In the US, we believe a new Farm Bill will phase out subsidies received by cotton farmers and replace them with de facto insurance programmes. Because the US cotton crop is less strategic than the corn and soybean crops (because they are inputs for the local livestock industry) and because cotton is less price competitive and profitable, we believe US cotton production will continue to decline over the medium term. We forecast cotton production in the country to decrease by only 5.0% on the 2012/13 level out to 2017/18. US cotton production has been on a steady decline over the past decade.

India Overtaking China
Select Countries - Cotton Production (as % of global)

In China, we believe the government will repeal its stockpiling policy by the end of 2014. It is still unclear how the policy will be replaced, but we believe any change will limit farmers' incentive to produce cotton over the coming years. Also, because cotton production in the country is very labour intensive, we believe the crop will lose competitiveness relative to less labour-intensive crops in a context of rising wages. Owing to the country's objective to become self-sufficient in several strategic food items (such as corn, sugar and pork), it will need to direct more land resources to these at the expense of cotton. Between 2012/13 and 2017/18, we forecast Chinese cotton production to decrease by 11.6%.

We believe India and Pakistan will benefit the most from the stagnating and declining production in the US and China respectively. We see strong cotton growth potential in India on the back of the widespread adoption of genetically modified seeds and given the strong potential for yields to increase further in the coming years. We forecast Indian cotton production to increase by 16.2% out to 2017/18. In Pakistan, investment in the quality of seeds and the recent granting of Generalised System of Preferences status to the country will boost local cotton demand, encouraging plantings. We forecast cotton production in the country to increase by 7.5% over our forecast period.

To a lesser extent, we see strong growth potential for cotton production in Africa on the back of the adoption of biotechnology, more generous government support and an improved business environment attracting foreign investment. We highlight Burkina Faso, Côte d'Ivoire and Mali as markets with the strongest medium-term potential.

Moving Consumption Centres: From China To South Asia

On the consumption side, we forecast China's share of global cotton demand to decrease from 35.0% in 2013 to 30.0% in 2018, while India and Pakistan will increase their combined share of global demand from 31.0% to 32.0% over the same period.

Chinese Textile Decline In The Making
Select Countries - Cotton Demand (as % of global)

Even though the Chinese textile industry has experienced a sharp decline since the 2008 financial crisis, we expect only moderate declines in textile production to come in the coming years on the back of the recent distortions introduced by the government's stockpiling programme and rising wages in a very labour-intensive industry. This will leave cotton demand growth stable or in negative territory for most of our forecast period. We forecast Chinese cotton demand to decrease by 1.0% between 2013 and 2018.

India and Pakistan will benefit the most from this retreat, with more local cotton output made available for the industry, and owing to increased foreign investment and stronger labour competitiveness. The two countries also will benefit from trade routes and logistics put in place by China, at least until they develop their own.

We see strong growth potential for the textile industry in Vietnam and Bangladesh, but both countries will suffer from the scarcity of raw material locally, substandard logistics, and a lack of health and safety rules for the industry.

Read the full article

This article is tagged to:
Sector: Agribusiness
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.