Where will cotton be in 10 years time? A vision for the future. Plexus Cotton Limited March 2011
Trying to predict the future is like trying to drive down a country road, at night, with no lights, while looking out the back window. (Peter F. Drucker, writer.)
Cotton Overview. From over production to over consumption.
Production
Historical Production 28,000 140 26,000 120 24,000 22,000 100 20,000 18,000 80 60 16,000 14,000 40 12,000 20 10,000 0 1970/71 1972/73 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 p '000 MT c/lb PROD (kmt) Cotlook A Source: ICAC Cotton World Statistics
Historical Production 40 years trending upwards. Over production. U.S. Farm Bill / E.U. Subsidies Artificially low prices? WTO & Brazil Early 2000 s: GM production explosion
Limited Planted Area Variation. 28,000 50,000 26,000 45,000 24,000 22,000 40,000 20,000 18,000 35,000 30,000 16,000 14,000 25,000 12,000 20,000 10,000 15,000 1970/71 1972/73 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 e 2010/11 p 2012/13 p 2014/15 p '000 MT '000 Ha PROD (kmt) AREA (kha) Source: ICAC Cotton World Statistics
2002/03 2004/05 2006/07 2008/09 est. 2010/11 proj. 2012/13 proj. 2014/15 proj. 2000/01 1998/99 1996/97 1994/95 1992/93 1990/91 1988/89 1986/87 Yield Gains 900 800 700 600 500 400 300 Source: ICAC Cotton World Statistics 1970/71 1972/73 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 Kgs/Ha
Acreage Outlook Irrigated cotton acreage limited by water constraints.
Acreage Outlook Irrigated cotton acreage limited by water constraints. Competition for acreage between cotton and grains.
Acreage Outlook: Comparative Crop Prices Source: Impact of Demand Driven Cotton Cycle Lea ITMF Textile Value Chain Meeting, 2011P
Acreage Outlook Irrigated cotton acreage limited by water constraints. Competition for acreage between cotton and grains. Food before fibre.
Acreage Outlook Irrigated cotton acreage limited by water constraints. Competition for acreage between cotton and grains. Food before fibre. Ethanol mandate displacing food acres.
Food Commodity Prices Source: Food & Agriculture Organization (U.N.) March 2011
Acreage Outlook: Population v Agricultural Land. 2.4 2.2 2 1.8 Population Growth Index Agricultural Land Growth Index Index: 1961 Population: 3.07 Bn Agr. Land: 44.5m sq km 1.6 1.4 1.2 1 1961 1967 1973 1979 1985 1991 1997 2003 2009 Source: World Bank
Yield Outlook: Can yields continue upwards? ICAC May 2010: The incoming technological innovations are expected to have greater impacts on production costs than cotton yields. Limited scope for nearby technological increases. Potential of bio engineering & gene technology is difficult to predict. Heat/cold/drought resistance. Make unsuitable land suitable?
Production Outlook Strong prices will encourage production. Fierce acreage competition from food, feed and fuel crops will limit potential production gains. Yield increases more gradually and depending upon technological advancement.
Consumption
2000/01 2002/03 2004/05 2006/07 2008/09 e 2010/11 p 2012/13 p 2014/15 p 1998/99 1992/93 1994/95 1996/97 1990/91 1988/89 Consumption. 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 CONS (kmt) Source: ICAC Cotton World Statistics 1970/71 1972/73 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 1986/87 '000 MT
Consumption. 2004/05 onwards: BRIC country awakening. Population migration & middle class expansion. Increasing textile demand Increasing protein demand A consumption driven world economy.
Global Cotton Fibre Consumption Average global per capita cotton consumption IF = Average U.S.A. per capita cotton consumption 470m Bales Consumption 4-fold increase in global production requirement
PRC Retail Sales 18 16 14 Trillion RMB 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2018p 2019p 2020p 2016p 2017p 2015p 2014p 2013p 2012p 2011p 2010 2009 PRC Retail Sales 90 80 70 60 50 40 30 10yr avg growth rate 5yr avg growth rate Trillion RMB 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Cotton s Share of Global Fibre Consumption 90 80 70 Non-Cotton Fibres (MT) Cotton (MT) Millions MT 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2015 PROJN Source: ICAC Cotton World Statistics
Supply Chain Price Response: The U.S. Cotton Example. Source: Cotton Inc & ICAC: Pass Through Analysis of Cotton Prices
Consumption Outlook Consumption continues to grow, driven by demand from developing markets. Price remains firm & cotton s share of fibre market continues to decrease on supply limitations. Cotton increasingly becomes a luxury item.
Man Made Fibres
Real Prices of Cotton, Polyester & Oil. Source: ICAC Revisiting the Relationship between Cotton, Polyester & Oil Prices
Cotton, MMF & the Oil Price Effect. Correlation between oil, polyester & cotton prices is complex & often overstated. ICAC Report Jan2011: No stable relationship, but.. A shock in oil price shifts the equilibrium polyester price and this, in turn, shifts the equilibrium cotton price.
Cotton, MMF & the Oil Price Effect. Correlation between oil, polyester & cotton prices is complex & often overstated. ICAC Report Jan2011: No stable relationship, but.. A shock in oil price shifts the equilibrium polyester price and this, in turn, shifts the equilibrium cotton price. Cotton cannot be divorced from oil & polyester prices.
Energy Costs in the Supply Chain
World Stocks/Use v Spot Futures 160 0.6 140 0.55 120 100 0.5 C/LB 80 0.45 60 0.4 40 Spot Futs S/U 20 0.35 Jun-99 Oct-99 Mar-00 Aug-00 Jan-01 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Mar-06 Aug-06 Jan-07 Jun-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Oct-09 Mar-10 Aug-10 Source: ICAC Cotton World Statistics September 2010
The Dollar Outlook US Budget Deficit Fiscal 2011: 1.66 trillion US Public Debt end 2011: 15.8 trillion 42 cents in every dollar spent must be borrowed or printed. Interest payment on National Debt: $430 billion p.a. About 1/3rd of tax receipts
The Dollar Outlook For every 1% in interest rate increase, the interest on National debt will rise approximately 150 billion dollars (35%) National Debt increases by more than the annual budget deficit, because it includes offbudget items like appropriations for Iraq/Afghanistan wars.
Gold: The Ultimate Hard Currency
Futures Market: Index Funds Moving in from bond markets. Global Bond v Commodity Markets (Trillions): Bonds: USD 85 Commodity Futures: USD 1.2 Commodity OTC: USD 10 90 80 70 60 50 40 30 20 10 0 USD Trillions OTC Futures Bonds Bonds Commodities
Increasing Commodity Index Products
Cotton (lbs) per Gold Oz.
CRB & Gold in USD
Price Outlook A new price arena? Limited scope for production increases Increasing consumption. Weak Dollar outlook. Strong long term Prices Security & Sustainability of Supply
Sustainability & Traceability No longer buzzwords. Social and environmental credentials = core product attributes. The Cocoa example.
The Cocoa Example: Initiatives & Brands
Sustainability in the Cotton Supply Chain Retailer/brand needs control & visibility of supply chain to ensure: Security of Supply Security of Price
Price Discovery
Cotton Futures Market Global Cotton Prodn USA 12% Suitable for Price Discovery? US cotton delivery only 12% of world prodn. 34% of world trade. Not enough physical supply. Operational imbalance in the futures market. INDIA 23% CHINA 31% ROW 34% Global Cotton Exports INDIA 18% UZB 10% OTHER 38% USA 34%
A new vehicle for price discovery is required. Needs to allow delivery Share of Global Cotton Production of cotton from Australia & Brazil. OTHERS 26% CHINA 32% China, India, Africa & CIS need to follow, but more difficult. AUS 2% BRAZIL 5% USA 12% INDIA 23%
Conclusions Acreage & yield limitations. Inflationary price pressures. Global Consumption. Security Of Supply controlling supply @ origin ensuring sustainability & traceability obtaining price stability. Proper Price Discovery