Cotton traders hurt by threadbare prices as US subsidies bite

PEOPLE stocking up their wardrobes in this summer's sales at clothing outlets probably have not noticed, but the price of cotton is plunging, testing levels not seen for 15 years.

The ancient fibre is suffering from a classic case of excess supply, the sort of economic disease which requires drastic cures such as droughts or wars. Or an end to US farming subsidies.

Those in the cotton industry are in no doubt that the US Government's protection policies are directly to blame for the surplus stocks that are depressing their markets.

Cotton traders can only hope that at 46 cents per pound of the material, compared with $1.20 at its peak in 1995, growers outside the US will deem it unfeasible to sow their seed for next season, giving the market a chance to absorb the stockpiles.

But this seems highly unlikely. A recent report from the International Cotton Advisory Committee warned that increased plantings in the northern hemisphere, which is benefiting from favourable weather, were to blame for the latest downward pressure on prices. It said prices had been this low only twice in the past 25 years, in 1999 and mid-1986, and were not expected to rebound without a major crop disaster.

The committee did not pass comment on why stocks had reached such devastating levels. But British cotton traders are not so diplomatic, saying the US Government is injecting $2.7 billion (1.9 billion) a year into its country's cotton industry to support crops that would otherwise incur huge losses.

They say the US farmers could never compete with southern hemisphere growers, such as world leader Australia, which survives without subsidies.

Also dependent on government handouts are Greek and Spanish growers, who are thought to receive payouts approaching $1 billion a year between them.

Traders argue that the lower prices have been absorbed at various stages through the production chain, including clothing retailers.

However, with cotton accounting for such a small slice of the cost of fashion items, the impact is unnoticeable to consumers.

The spinning industry is renowned for its cyclical nature, which is usually blamed on fluctuating cotton prices. But by the time the material reaches weaving and fabric companies, such movements have less impact.

"The price of yarn is driven more by supply and demand for that product than by raw material prices," said one fabric manufacturer. "There are other factors at play, such as with denim, which is a commodity business that could be affected by cotton prices more than most fabrics. But the overcapacity in that industry is having a bigger impact on the price of denim than that of cotton."

Cotton traders believe there is little relief in sight, with production expected to grow more rapidly than demand next season, leading to a further rise in stocks.

Their best hope lies in the chance that Australian farmers will reduce their sowings in the coming season, enabling stocks to dwindle.

But they acknowledge that this would be only a short-term solution to the longer-term problem of American subsidies and their crippling impact on cotton prices.

Copyright 2001
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