With the global economy in transience, those in the cotton business face a unique and unprecedented raft of challenges. Finbarr Bermingham speaks with textiles manufacturer Olam International’s managing director, global head of natural fibres, Jagdish Parihar.


GTR: What are the major issues facing the textiles industry in 2013?

Parihar: Competition with other crops and synthetic fibres is a major issue. The production of cotton has been declining as cotton is losing acreage to other competing crops like corn and soybeans in markets such as Brazil and the US, where these alternate crops have offered better returns to farmers. For example, cotton production was 26.4 million tonnes last year, but by the end of 2013 it is likely to fall to 25.3 million tonnes.

The land area under cultivation for cotton farming has also reduced considerably from approximately 35.7 million hectares in 2011 to 33.5 million hectares in 2013. However, yields have been generally rising over the last decade, stabilising recently, compensating for the decrease in area under cultivation.

Cotton has also lost some of its market share to popular synthetic fibres such as polyester. For example, in previous years, cotton has enjoyed a market share of almost 43%, but today it has declined to 36% and it is likely to be maintained at this lower level due to a lack of price competitiveness with polyester. To operate successfully in this market one must be able to offer customers exactly what they want when they need it. This means having a well-diversified footprint across the globe to offer all grades of cotton, from low to medium staple to extra long staples, and that are traceable and sustainable.

Another issue is the complexity of the cotton supply chain. The entire process from growing cotton to placing a garment on a retailer’s shelf can take over 12 months. Then once you add the time for decision-making by the farmer and actual buying by the consumer it can exceed 16 months, which does not always give the farmer the ability to adjust to upstream price signals. This exposes the chain to significant risks arising from shifts in demand and supply.

At the producers’ end, the main risks are the weather and cotton price. Similarly, at the mill end, the main risks are cotton prices and counterparty risk, which arise from sharp price drops after cotton has been committed. In 2011, during a period of serious volatility, the price declined over 90 US cents in a short three-month window, which caused a lot of market disruption at the time. At present it is encouraging to see a much more stable price scenario but it is still important to have relevant financial instruments in place to mitigate risk.

GTR: How has the market for your produce changed over the years?

Parihar: Over the last decade, the major market growth has been Chinese expansion from its entry into the WTO and the elimination of global textile import quotas. China’s use of cotton mills doubled from 2000/01 to a high of 11.1 million metric tonnes (mt) in 2007/08, accounting for 74% of the world growth for this period. It has since declined to 7.8 million mt due to the global recession: global mill demand has fallen to 3.3 million mt and the decline can mainly be explained by China, where demand is down by 3.5 million mt. Due to the severe price volatility in 2010/11, world cotton consumption declined from 24.5 million mt in 2010/11 to 22.10 million mt in 2011/12.

GTR: How much effect do fluctuations in commodity prices have on your operations? How can you counter this?

Parihar: Navigating and managing commodity price fluctuation are part and parcel of the cotton business. Over the last 20 years, Olam’s cotton business has grown due to its ability to identify, capture, measure, monitor, manage and control potential business risks.

There are various spread and futures option tools available to help protect against price volatility. However, more general risk options that are available from the large commodity exchanges can be quite expensive without being specifically tailored to the market. We have developed a range of risk management products for our customers.

GTR: Can you tell us a bit about your banking relationships, financing requirements and how you find borrowing conditions in 2013?

Parihar: In most cases, our funding has come via centralised banking relationships but in some cases, we do access the local banking market for additional sources of funding. This applies to the Olam Group and is not specific to our cotton business. We use a variety of instruments for both short and long-term financing. Generally it [borrowing] has become more difficult for the industry. Since the global financial crisis, we [Olam Group] have diversified our sources of lending beyond the banking market into other sources of lending, such as bonds, convertible bonds, perpetuals, development finance institutions and Islamic financing.