You have once said, "Cotton prices are being driven by strong demand and fundamentals rather than speculators." Can you elaborate on it?
Each cotton season is different, and the factors that drive prices up or down vary from season to season. However, a broad observation over my 25 years working at ICAC is that price speculation on the cotton futures market in New York has almost never been a driving force causing volatility in prices. Rather, futures almost always follow the market, they don’t make the market. Despite claims by government officials, and charges of manipulation by market participants who have made decisions that are costly, the cotton futures contract follows market fundamentals, market fundamentals don’t follow futures.
How does China’s cotton purchase and storage policy impact cotton production in the rest of the world? Do you anticipate any changes in the Chinese Government policy in near future?
World cotton consumption in 2013/14 is projected to be below production for the fourth consecutive season, and stocks are expected to reach a record level. Cotton prices are above their long-term average, supported by the procurement policy of China. This policy maintains domestic cotton prices at approximately 50% above current international prices. Stocks held in the national reserve of China account for approximately half of world stocks. By artificially supporting prices, this policy is undermining the long-term competitiveness of the cotton industry and creating much uncertainty. When and how these stocks are liquidated is the key unknown factor that will define the fundamentals of the world cotton market over the next several years.
Cotton as an industry must constantly work to reduce costs improve efficiency and cater to the needs of customer in order to remain competitive. Do you agree? Can you explain it further?
In round numbers, the real price of cotton on the world market in current dollars has fallen from more than $3 per pound in the 1950s to about 90 cents per pound today, and a further decline is inevitable when the procurement policy of China changes. To remain viable, the cotton industry must continue to raise productivity and improve efficiency. Higher yields with lower input use, lower costs of ginning, transportation, storage and marketing, and greater efficiencies in cotton spinning, weaving, knitting and finishing are necessary for the cotton industry to survive. Research to improve technology, and industry cooperation to improve efficiencies are the keys to the future of the cotton value chain.
International cotton prices have declined in real terms over the last six decades because of advances in technology. What will be the impact of it on various cotton producing regions, including Asia and Africa?
The world cotton market is like a bathtub, there can be ripples on the surface, but the level of water in the bathtub is going to be the same at both ends. Likewise, there can be differences in prices owing to location and quality differentials, but the entire cotton market goes up and down as one market. Therefore, smallholder producers in Asia and Africa are affected by changes in prices to the same degree as large capital intensive farms in other regions. All cotton producers have to adopt new technologies to raise yields while lowering input use in order to remain viable.
Finally, what is your suggestion to the cotton producers to stand out in a competitive world economy with multiple suppliers?
Limit contamination, ensure contract fulfillment for both timing and quality, and improve quality over time. These are the characteristics of cotton that spinners require and that merchants are looking for.
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