The world's yields have increased by 22% in last...
Jagdish Parihar is the Managing Director and Global Head Natural Fibres of Olam. He converses about various topics related to cotton with Fibre2Fashion Correspondent Manushi Gandhi.
Synopsis:
Olam is an international company that manages the supply chain of various agricultural products and food ingredients with its headquarters in Singapore. The natural fibres business is one of the oldest businesses of this multinational company. Its sales revenue for the financial year 2012 was S$17.1 billion. The company operates through 16 platforms across 65 countries.
Jagdish Parihar, the Managing Director and Global Head of Natural Fibres division of Olam is associated with the company for more than 25 years. He started his career with Tolani Shipping in India where he was involved in purchase and sale of bulk carriers. Jagdish left India in 1986 to pursue a career in international agri business and joined the Kewalram Chanrai Group in Africa. He holds a degree in Business Management from Birla Institute of Technology & Science Pilani under the MIT Ford Foundation Programme.
Excerpts:
Since how long have you been associated with Olam? How did you start your career?
I joined the parent group Kewalram Chanrai in Nigeria in 1986 where I was mandated to develop cotton agricultural complex consisting of a cotton farm, a gin and an oil mill. Then I moved to London in 1990 for developing agricultural exports out of Africa. This is the time when I joined Olam. Our business in the UK was primarily focused on exporting commodities from Africa and selling them to the merchants in the UK. We moved to Singapore in 1996 and expanded our geographical footprints to Asia, South America, Australia and the US. We also expanded our product range beyond cotton to products such as sugar, packaged foods rubber, timber and rice. Today we have over 16 product platforms covering food ingredients and raw materials such as cotton and wool. We market the commodities to over 12,000 customers worldwide. This is quite an interesting business. Frankly, through my time at Olam it has been a great experience to build a global agri-business, not only in cotton, but also other commodities.
Olam is involved in many other businesses related to agricultural products. What is the significance of natural fibres in total business output of Olam? Will you be able to determine any percentage share?
Natural fibres are one of our oldest businesses. Olam has been involved in textiles for over a century, but we have been growing the cotton business over the past 20 years. Today, Olam is the second largest merchant in the world.
Tell us something about the acquisition of Queensland Cotton in Australia? Why was Olam interested in this acquisition?
The QCH acquisition was completed in 2007 which has expanded expand our footprints in Australia, the US and Brazil. It has also made us a universal supplier as today we have all the different varieties of cotton in our portfolio, right from low grade to medium staple to extra long staple cottons.
Olam is mainly into exporting of various agricultural products. Can you please tell us in which countries you sell the natural fibres? Can you explain us the full chain of Olam natural fibres?
The value chain of cotton starts from cultivation of cotton, through to ginning and processing, logistics and distribution. Now, the important function is marketing cotton to mills, which is done from our Singapore headquarters.
I would also include retailers in our value chain with whom we are exploring new alliances. We are trying to link our African operations with the retailers and the consumer requirement.
There are over 25 consuming markets for cotton, but the main markets are primarily in Asia, particularly the Far East countries like China and the Indian subcontinent. Over the years, the industry has shifted from Europe to Asia mainly as Asian countries are more competitive on the cost of textile production. Our key markets are in China, India, Bangladesh and Pakistan. All these countries also produce cotton except for Bangladesh.
What is the status of production of natural fibres in the year 2013, when compared to that of 2012?
The production of cotton has been declining as cotton is losing acreage to other competing crops like corn and soybeans. These alternate crops offer better returns to the farmers in Brazil and the US. Cotton production was 26.3 million tons last year, but this year, it is likely to fall to 25.7 million tons.
The land area under cultivation of cotton farming has also reduced considerably from approximately 35.5 million hectares in 2011 to 34.0 million hectares in 2013. However, the yields have remained stable and have been generally rising which compensates the decrease in area under cultivation.
Cotton has also lost its share to polyester. In the previous years, cotton has enjoyed a share of almost 43%, but today it has declined to 36% and is likely to be maintained.
What is your opinion about BT cotton?
BT Cotton has been a successful initiative in India and contributed to increase in domestic production. There are some regulatory constraints on the use of BT seed in some African countries which need to be tackled in the interest of increasing cotton production.
What is the role of Africa in the global cotton market?
Africa is very close to our heart. We are a leading player there. Africa used to produce over 2 million tons of cotton but its share in world production has declined from 8% to 5%. This decline occurred post privatization of the industry in Africa when adequate investment was not committed to agricultural research and logistics solutions.
The industry was exposed to several low price regime years in the last decade when cotton prices fell by 40% to 50%. This led to a lack of providing timely supply and at such low prices farmers could not even recover their cost of production leading to continuing decline in cotton farming.
The African yield today is at a low level of around 350 kg per hectare which is below 50% of the world’s yields. When compared to Australia, it is 16% of the Australian yields. The world’s yields have increased by 22% in last couple of years level. However, this is changing and we are seeing production and prices begin to improve.
To support this, at Olam, we not only aim to achieve good farming systems, but also ensuring that the chain is traceable as well as sustainable. Today, we engage directly with more than 100,000 cotton farmers across Africa to assist them with quality agricultural inputs and agronomic services to improve farm yield and quality. We have also established a very strong corporate responsibility and sustainability programme called the Olam Livelihood Charter where we work closely with African farmers to ensure they make the best use of their land, motivating them to increase their productivity by providing an assured income. We have also invested in developing cotton gins close to the smallholder farmers to improve supply chain efficiencies of transporting the raw cotton which has in turn created more local jobs and together all these facets are starting to create a more thriving cotton industry in parts of Africa.
What are the risks involved in the business of natural fibres?
The cotton supply chain is extremely complex. The entire cycle from its cotton production to delivering a garment on a store’s shelf in the US takes about over 12 months.
This exposes the chain to significant risks arising from shifts in demand and supply over the long tenor. At the producer end the main risk is cotton price and weather. Similarly at the mill end the main risk is the counterparty risk which arises from fall in prices after cotton has been committed. In 2011 the price declined over 90 cents in a short three month window, This created havoc in the industry. It is heartening to see a much more stable price scenario.
What kind of tools should be adopted to reduce the risks?
Across the value chain it is only the merchant who practices any real risk management.
Olam provided risk management solutions to help it customers maintain and protect its margins a volatile environment.
There are various spread and futures option tools available to help protect around price volatility. Normally, vanilla risk options available through platforms such as the Intercontinental Exchange (ICE) are very expensive. We have developed customized, affordable and flexible risk management products for our customers. This also includes helping our customers to have better visibility of the emerging supply and demand dynamics through our own market intelligence activities.
Is the demand for organic cotton very low in the international market?
Yes, this is correct and recently when I was in the US, I saw some shirts containing 5% of organic cotton. It seems consumers are unwilling to pay any substantial price premium for such products. In food industry the benefits of organic food are clearly visible but the USP’s are limited for the buyers of organic cotton products.
Organic cotton supply chains are unviable as it is costly to produce, difficult to certify and controlling its use in the supply chain is complex.
Instead of organic cotton, there are many other cotton sustainability schemes like Better Cotton Initiative (BCI) or Fair Trade cotton that put the social and environmental factors at the heart of production. Through our work independently and with the Better Cotton Initiative I believe that there is more potential in these initiatives where there is genuine attempt to produce sustainable cotton and ensure ethically-driven supply chains as these also have a more commercially feasible proposition as well.
