China has provided support to prices, avoiding what could have been a very dramatic collapse in prices.
In Face2Face on Fibre2Fashion, with its Correspondent Cindrella Thawani, ICA president Antonio Esteve talks about the macroeconomic instability impact and its chaotic situation on the cotton prices.
Synopsis:
The International Cotton Association (ICA) is the world's leading international cotton trade association and arbitral body. It was established in 1841. It has more than 400 members which include some of the world’s major cotton companies.
Antonio Esteve caters as the President of ICA and CEO of Ecom Cotton Group. Moreover, he serves as President of two local Brazilian NGOs that are President of Casa da Pazand and Associação Beneficente Nossa Senhora.
He achieved his Bachelor of Science in Business Administration degree in 1977 from
Georgetown University, Washington DC
He began his career in Paraguay that same year, setting up as well as managing a cotton gin, and also founding a soybean trading operation.
Excerpts:
How do you foresee the role of profit for investors in to the cotton market? How it would be in the coming years?
We have seen a huge amount of investment money flowing to the commodity markets in recent years, including the cotton market. Commodities have become an asset class, just like stocks, bonds and equities in general.
These money flows have, at times, provoked distortions to prices, heightening the inherent risk of trading with futures. These investment flows are bound to continue and to provoke higher volatility and wider price ranges. The industry needs to learn how to deal with this reality.
How do you see the encouraging growth in to the production of organic cotton?
Actually, I see organic cotton as a niche market. The volume of organic cotton produced in the world today only represents a mere 0.5 per cent of total world cotton production.
The model for promoting an increase in organic cotton does not work. It is very costly to produce organic cotton, with low yields, which requires rotation with other crops.
At the same time, we hear a lot of rhetoric from the retailers, but in practice, they are not committed to ‘paying up’ for farmers to produce organic. There is also a lagging concern about the authenticity of all the organic cotton that is being certified, which weakens the potential growth of this market segment.
In the ongoing BT cotton trend, where every country is concerned about its high exports through the high production/cultivation of cotton. Do you think in that organic cotton is losing its shade/presence from the global market?
As per my response in the prior question, I see organic cotton as niche and that it will remain as such.
A large scale solution that addresses sustainability in cotton and is in the process of being developed, with the support of many major retailers, is BCI Cotton (Better Cotton Initiative). I believe the cotton industry needs to rally around this initiative to ensure a sustainable cotton business in the years ahead.
Do you think that high corporate tax could be a back-slide to the textile sector in the country like China and where other countries should be wary about it? As consequently, it can discourage the cotton production? Please interpret.
The final consumer demand for cotton products ultimately determines how much cotton the world needs to produce to satisfy that demand. This demand has been growing, on average, at an annual pace of two percent in recent years.
We believe, this will persist into the foreseeable future. While cotton may lose market share to synthetic products, it will still enjoy absolute growth. Tax issues will not discourage the production of cotton, but we may see a shift to the most tax efficient locations.
Please highlight further concerning issues which can impact the global cotton market/sector?
The world macroeconomic instability, especially in USA and Europe, is a major issue of concern. Macroeconomic factors are impacting commodity prices in general, and cotton in particular, to an extent that many times exceeds the impact of supply and demand factors.
This past year we saw prices rise from around 70 cts/lb in the third quarter of 2010 to over $2.20/lb in March 2011, only to fall back under $1.00 by July 2011.
These exaggerated price ranges have played havoc with the market, along with the profitability of all players in the cotton supply chain and have negatively impacted the performance of contracts. This sort of price behavior is extremely detrimental to the cotton industry.
Being a premier arbitral authority where world’s cotton exports are sold under ICA rules. How far the move to keep abreast is necessary with this ever changing cogent industry?
Keeping abreast of the challenges facing the cotton industry, across all areas of the supply chain, is vital at the ICA. We do this via our members and our membership committees - such as the ICA Rules Committee.
Our membership is growing. At the last count we had over 500 members - firms and individuals, representing all sectors of the industry. In recent years we have been proactive in expanding and diversifying our membership.
Last year we introduced a more inclusive membership structure to attract members from all links in the supply chain, from all over the world. This has been a success with membership up by 34 per cent. This year, we want to further expand our membership to include brokers and agents.
We constantly review and revise our Bylaws and Rules to adapt them to the industry´s changing needs and we will continue to promote the principle of contract sanctity as the keystone for a sustainable cotton supply chain.
Global cotton supply and demand estimates indicate higher supply and lower consumption. How far it is going to result in the year ahead?
Due to prices rising to exaggerated levels this past year, there has been demand destruction of approximately 10 percent. At the same time we have seen world acreage increased by 20 per cent, from 30 million hectares to 36 million hectares. The world will therefore produce a surplus this marketing year of approximately four million tons.
Fortunately, China has stepped up and decided to absorb the excess cotton and stockpile it in its reserve stocks. This action by China has provided support to prices, avoiding what could have been a very dramatic collapse in prices.
Meantime, with these reserves in hand, China has the possibility of controlling any exaggerated advance in prices in the year ahead by selling this cotton back to the market. Therefore, we can foresee more stable prices trading within a range.
As the leading international cotton trade association, please tell us how ICA services are beneficial to the cotton consumers, buyers and sellers?
It is essential to create a safe trading environment for all sizes of businesses to protect themselves against potential trade risks and disputes. This is where the ICA can help.
The ICA is the world's largest and most recognised arbitral body. The core principle of the ICA is to promote safe trading so that contract sanctity may be preserved - essential to having a sound and sustainable cotton trade. Being a member of the ICA shows the world market that you support contract sanctity and that you want to operate in a safe trading environment.
The majority of the world's cotton is traded under ICA Bylaws and Rules. Constantly reviewed and updated, the ICA Bylaws and Rules regulate the international trade of cotton and promote an orderly, commercial process between buyers and sellers. When contract disputes arise, the ICA provides a resolution process via arbitration.
In addition to our Bylaws & Rules and arbitration service, we deliver a range of industry training programmes plus international trade and networking events. These events provide a platform to engage and strengthen the cotton community, generating new trade opportunities and industry awareness. And, via ICA Bremen, we offer cotton testing, research and quality training.
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