PCCA - Plains Cotton Cooperative Association Logo PCCA Commentator Magazine Masthead. Vol. 46, No. 1 | Winter 2016

Letter from the President

Thinking About the FutureKevin_Brinkley

Lately, I have been taking stock of our assumptions about how we view markets for cotton. Much of what we believe is shaped by the momentum of news and analysis we read. I think we sometimes tend to put all our eggs in one basket. Maybe it’s time we applied a little common sense to our expectations about reliable buyers for our fiber.

Who can and will buy cotton in the future?

Because cotton is primarily an exported product in the U.S., we have to look for the customer base of the future. Therefore, someone around the globe must have the means to manufacture and purchase cotton-based products.

Although not perfect, Gross Domestic Product (GDP) is probably the best measure of a country’s economic ability to consume apparel and textiles. It’s the combined value of goods and services generated by an economy. The GDP rate is usually the result of an economy’s population and productivity rate. So, who is at the top of the list when it comes to GDP firepower?

We’ve generally assumed that the most crowded place on the planet is China, and we’ve thought they are among the most productive. Both are currently true, but what about a few years from now? The facts point to changes in the future.

A World Dominated by Cities

In 2025, 37 cities in the world are projected to have a population of more than 10 million people. Seven of those are in China. There are several more in China that are just below 10 million. I suspect that China has known this is coming for years. The country has enforced a one-child per family policy since 1978. The math of this situation will play out over the next 30 years to a point where China’s population is projected to begin declining in 2050. And like most other developing economies, the population will be older on average than it is currently.

If you want to keep your economy growing, you must have producers. Perhaps this explains why China is the world’s largest investor in robotics technology. Demographic shifts around the world will require a rethink about future markets. These changes have and will continue to cause governments to implement policies that affect the normal operations of markets. An example of this is the subsidy program China operates for its cotton growers.

Rather than move to one of the large cities in China, farmers there can be enticed to remain in a rural area in the western part of the country and produce cotton for the equivalent of about $1.45 per pound for the government. Putting it mildly, that’s quite a bit higher than the prevailing price for cotton in the world.

Between cotton purchased from exporters and cotton grown internally, China has amassed 65.5 million bales of stocks (equal to nearly two years of mill use). The impact of that policy is hitting you in the wallet. At the urging of the U.S. cotton industry, our government has questioned the transparency and equity of the Chinese policy at the World Trade Organization (WTO) level. The Chinese government’s response? Basically that they will do whatever it takes to keep farmers in rural areas.

Is China Still Relevant?

Absolutely.

However, their cotton policies and a slowing economy have limited trade and affected the structure of our export business. Until they use up a significant portion of their reserve cotton, China has restricted imports to WTO minimums (which are a fraction of historical levels).

I hope they can figure a way out of the mess created by their decisions. In the meantime, we’re busy searching the world for the best markets for our members’ cotton. Countries with open trade structures and aggressive entrepreneurs will probably have a competitive advantage in sourcing our members’ cotton.

Sincerely yours,

Kevin Brinkley