Cotton Industry

Cotton Industry

THE MODERN COTTON INDUSTRY

COTTON POLICIES

THE OUTLOOK

BIBLIOGRAPHY

Gossypium —the scientific term referring to the genus of cotton plants—belongs to the small tribe of Gossypieae, which, in turn, is part of the Malvaceae family. Four separate species of cotton—two in Asia-Africa (G. arboreum and G. herbaceum ) and two in the Americas (G. barbadense and G. hirsutum )—have been domesticated independently, a process that is unusual among crop plants. While the geographical point of origin of G. arboreum is not known, the origin of G. herbaceum is the Arabian peninsula or Africa. The exact time and place of domestication of the Old World cottons is not clear but archeological remains recovered from sites in India and Pakistan indicate that domestication of G. arboreum took place about 4,300 years ago. Furthermore, because G. arboreum is agronomically superior to G. herbaceum, it was widely dispersed throughout northern Africa, Arabia, Iraq, and western India. With respect to the New World cottons, the earlier archeological remains of G. barbadense have been located in the coastal areas of Peru and Ecuador, dating 5,000 to 5,500 years ago. The primary route of dispersal appears to have been through the Andes into northeastern South America and later to Central America, the Caribbean, and the Pacific.

The oldest archeological remains of G. hirsutum have been located in the Tehuacan Valley of Mexico, dated from 4,000 to 5,000 years ago. The vast majority of cotton varieties used for lint production in the 2000s come either from G. hirsutum (referred to as upland cotton in the United States and middling elsewhere, accounting for 90% of global production) or from G. barbadense (referred to as long-staple cotton or Pima in the United States and Giza in Egypt, accounting for 10% of global production). The Asian-African species produce low-quality lint with low yields and have been mostly (but not entirely) abandoned. The oldest archeological record of cotton textiles was found in Pakistan and dates back to 3000 bce. Cotton specimens have been located in northern Peru, dating as far back as 2500 bce.

Trade of cotton goods was taking place between India and Persia as early as the fifth century bce. Cotton was brought to southern Europe (Greece, Sicily, and Spain) on a large scale by Arab traders during the ninth and tenth centuries CE while it was imported to North Europe during the thirteenth century. The known history of cotton in the New World begins with the arrival of Spanish explorer Christopher Columbus (1451-1506) in the Bahamas Islands in the autumn of 1492 (see John Baffes’s article “The History of Cotton Trade: From Origin to the Nineteenth Century” [2005] for a comprehensive history of the cotton trade).

Considerable growth in cotton production and trade took place toward the end of the eighteenth century. Several factors contributed to such growth. First, advances in industrial revolution lowered the costs of manufacturing textile products. For example, between 1786 and 1882, the labor and capital cost of producing one pound of yarn went from thirty-four shillings to one shilling. Second, the use of cheap slave labor in the United States lowered the costs of cotton picking (cotton along with sugar and tobacco are often referred to as the slave commodities). Prior to the U.S. Civil War, about one-third of U.S. slaves were employed in cotton fields. (In 1897 Mathew Hammond reported that of the 3.5 million slaves in 1840, at least 1.2 million were engaged in the U.S. cotton industry). Third, the invention of the saw gin by Eli Whitney in 1793, which changed the separation of lint and seed from a laborious to a simple mechanical process, freed labor that eventually became involved in cotton production (seed cotton consists of about one-third lint and two-thirds seed; the two byproducts of seed are cotton oil for human consumption and cotton meal for animal consumption).

Cotton trade was further enhanced with the arrival of the first steamer in New York in 1838, which effectively halved the time to cross the Atlantic. Because the steamers would bring information on the U.S. cotton market conditions to England in half the time compared to the actual delivery of cotton, cotton traders in Liverpool, England’s dominant cotton trading center at the time, began to trade forward contracts, thus giving rise to speculation. Furthermore, the successful installation of the first transatlantic cable in 1865 would transform cotton trade in a permanent way. For the first time in history, information on market conditions in the U.S. was transmitted instantaneously to England and vice-versa. By the end of the 1880s, five cotton futures exchanges (New York, New Orleans, Liverpool, Le Havre, and Alexandria) spanning three continents were trading cotton futures contracts and were connected by cable.

The global cotton industry was also affected by the U.S. Civil War, which caused exports from the United States to decline to a few thousand tons, from half a million prior to the war. Cotton prices experienced the most dramatic rise in the history of the commodity to cause what was coined later the “cotton famine.” England, whose textile industry would collapse without U.S. cotton supplies, sought supplies from elsewhere including Turkey, India, Central Asia, and sub-Saharan Africa. While the United States regained its dominance as the world’s key cotton supplier after the war, the other cotton-producing countries also held their position. The structure of cotton production has remained the same in the twenty-first century. However, throughout the twentieth century, especially the second half, cotton consumption moved from Europe to Asia where the most of the textile industry is located and where most of the synthetic fiber production takes place.

THE MODERN COTTON INDUSTRY

Global cotton production at the beginning of the twenty-first century averaged about 25 million tons, worth about $30 billion. About one-third is internationally traded, representing about 0.1 percent of global merchandize trade. Despite its low share in global trade, cotton trade is very important to many poor countries, especially in sub-Saharan Africa where an estimated 2 million rural poor households depend on the commodity.

Since the 1960s cotton production grew at 1.8 percent annually to reach 24 million tons in 2005 from 10.2 million tons in 1960. Most of this growth came from China and India and to a lesser extent from Australia, Greece, Pakistan, Turkey, and Francophone Africa. As of 2005 more than one-quarter of the area allocated to cotton was under genetically modified (GM) varieties, accounting for almost 40 percent of world production. GM cotton in the United States—where it was first introduced in 1996—currently accounts for about 80 percent of the area allocated to cotton. Other major GM cotton producers are Argentina, Australia, China, Colombia, India, Mexico, and South Africa.

China, the leading textile producer, consumes more than one-third of cotton output. Other major textile producers are India, Pakistan, Turkey, and the United States, which together with China account for more than threequarters of global consumption. Several East Asian countries have emerged as important cotton consumers. For example, Indonesia, Korea, Taiwan, and Thailand, which together consumed 130,000 tons in 1960 (1.2% of world consumption), absorbed more than 1.5 million tons in 2005 (6.5% of world consumption).

Between 1960 and 2005, cotton demand has grown at the same rate as population (about 1.8% per annum) implying that per capita cotton consumption has remained relatively unchanged at about 7.7 pounds. By contrast, consumption of man-made fibers, which compete closely with cotton, has increased consistently since the mid-twentieth century by 2.2 percent per annum, causing cotton’s share in total fiber consumption to decline from 60 percent in 1960 to 40 percent in 2002. Apart from the substantial reduction in their costs of production, the increasing share of chemical fibers reflects new uses, quality improvements which made their properties very similar to those of cotton, increased use for clothing suitable to extreme weather conditions (e.g. rain, cold) and other uses such as sportswear.

The three dominant exporters—the United States, Central Asia, and Francophone Africa—account for more than two-thirds of global trade. In the mid-2000s the ten largest importers account for more than 70 percent of global trade. Three major producers—China, Turkey, and Pakistan—also import cotton to supply their textile industries. The four East Asian textile producers— Indonesia, Thailand, Taiwan, and Korea—accounted for 22 percent of world cotton imports in 2002, compared to just 3 percent in 1960.

Real cotton prices have been declining since the nineteenth century, although with temporary spikes. The reasons for such decline are similar to those characterizing most primary commodities: on the supply side reduced production costs due to technological improvements and on the demand side stagnant per capita consumption and competition from manmade fibers. Between 1960 and 1964 and between 1999 and 2003 real cotton prices fell by 55 percent, remarkably similar to the 50 percent decline in the broad agriculture price index. Reductions in the costs of production have been associated primarily with yields increases (from 270 pounds per acre in 1960 to 625 pounds per acre in 2005). The phenomenal growth in yield has been aided by the introduction of improved cotton varieties, expansion of irrigation and use of chemicals and fertilizers. Technological improvements have also taken place in the textile industry, so that the same quality of fabric can now be produced with lower quality cotton, a trend that has taken place in many other industries whose main input is a primary commodity.

World cotton trade is carried out by a large number of cotton trading companies—the so-called cotton merchants. A survey conducted in 2005 by the International Cotton Advisory Committee (ICAC) found that 21 large companies (either private or state-owned) traded cotton during 2004 with volumes greater than 200,000 tons. Another 48 companies traded cotton with volumes between 50,000 and 200,000 tons, followed by 43 firms with volumes between 20,000 and 50,000 tons and another 362 smaller companies with volumes less than 20,000 tons.

There are two widely used price indicators in the cotton market: the Cotlook A Index and the New York Board of Trade (NYBOT) futures price. The A Index—compiled daily by Cotlook Ltd., a private company located in Liverpool, United Kingdom—is the average of the five lowest quotations of nineteen types of cotton traded in the ports of East Asia. Quotations of NYBOT futures are readily available continuously from the NYBOT. Apart from NYBOT, whose contract exhibits high liquidity, Brazil, India, and China operate cotton futures exchanges.

COTTON POLICIES

Cotton has been subject to various marketing and trade interventions; typically taxation in low income countries, especially sub-Saharan Africa and Central Asia, and subsidization by rich countries, especially the United States and the European Union (EU). The ICAC, which monitors cotton subsidies on a regular basis, reported that in 2001—the year in which support was highest—government assistance to U.S. cotton producers reached $3.9 billion, China’s totaled $1.2 billion, and the EU received almost $1 billion. The high level of cotton subsidies also coincided with cotton prices reaching their lowest level ever, causing two noteworthy reactions, the Brazil/U.S. cotton dispute brought to the World Trade Organization (WTO) in 2002 and the Francophone Africa cotton initiative submitted also to the WTO in 2003.

On September 27, 2002, Brazil requested consultation with the United States regarding U.S. subsidies to cotton producers. On March 18, 2003, the Dispute Settlement Body of the WTO established a panel to examine the issues, and on April 26, 2004, the WTO issued an interim ruling in favor of Brazil. The final ruling (issued on September 8, 2004) concluded that the United States is under the obligation to take appropriate steps to remove the adverse effects or withdraw the subsidy. While the United States removed a small share of its subsidies in July 2006, it appears that more must be done in order to fully comply with WTO’s ruling.

On May 16, 2003, four West African cotton-producing countries (Benin, Burkina Faso, Chad, and Mali) submitted a joint proposal to the WTO demanding removal of support to the cotton sector by the United States, China, and the European Union and compensation for damages until full removal of support. The West African countries were aided in this move, often referred to as the “cotton initiative,” by IDEAS, a Geneva-based nongovernmental organization funded by the Swiss government. It is believed that the inability to successfully deal with the cotton initiative played a role in the WTO’s collapse of the Fifth WTO Ministerial in Cancun (September 10-13, 2004). The cotton initiative also figured prominently in the Sixth WTO Ministerial in Hong Kong (December 13-18, 2005).

THE OUTLOOK

The future of the global cotton industry is likely to follow a similar path as other primary commodities. Prices are likely to decline even further, mainly a reflection of technological improvements. Consumption, which has been growing at the same rate as population growth, will, most likely, continue to grow in a similar fashion. If twenty-first-century trends continue, GM cotton will most likely dominate the global cotton market. Organic cotton, on the other hand, despite concerted efforts has not made much progress. The key reason behind the GM and organic cotton trends is that, because it is not a food crop, there is not much consumer resistance. Finally, the competition from synthetic fibers will continue, although there is evidence that consumers’ preferences have changed toward consuming more cotton.

SEE ALSO Agricultural Industry; Slave Trade; Slavery; Textile Industry; U.S. Civil War

BIBLIOGRAPHY

Baffes, John. 2005. The Cotton Problem. World Bank Research Observer 20 (1): 109–144.

Baffes, John. 2005. The History of Cotton Trade: From Origin to the Nineteenth Century. In Cotton Trading Manual, ed. Secretariat of the International Cotton Advisory Committee. Cambridge, U.K.: Woodhead Publishing Limited.

Baffes, John, and Ioannis Kaltsas. 2004. Cotton Futures Exchanges: Their Past, Their Present, and Their Future. Quarterly Journal of International Agriculture 43: 153–176.

Brubaker, C. L., F. M. Bourland, and J. F. Wendel. 1999. The Origin and Domestication of Cotton. In Cotton: Origin, History, Technology, and Production, eds. C. Wayne Smith and J. Tom Cothren. New York: John Wiley and Sons.

Hammond, Mathew Brown. 1897. An Essay in American Economic History. New York: Johnson Reprint Co.

International Cotton Advisory Committee. 2003. Production and Trade Policies Affecting the Cotton Industry. Washington, D.C.: Author.

International Cotton Advisory Committee. 2005. The Structure of World Trade. Cotton: Review of the World Situation 58 (January-February): 11–15.

John Baffes