Carlos A. Valderrama, ICAC
Several factors can influence cotton competitiveness and eventually increase the rate of growth of consumption. Price is one factor. Price competitiveness is related to gains in productivity, to the cost of labor in relation to the competition and to exchange rates. However, if we are to think of price competitiveness of cotton at the world level, it is evident that the only element behind price competitiveness is productivity. Beside prices, other factors that influence consumption patterns are quality and diversity of uses, both related to research and promotion. Prices and diversity of uses affect consumption in an objective way, while the impact of quality on cotton consumption has both objective and subjective elements. ¹
Consumers perceive the quality of a product subjectively, based on preferences, and consumer preferences are developed according to the information a consumer has about a product. Traditional economic theory assumed that consumer tastes and preferences are largely fixed and therefore cause only marginal changes in consumption from year to year. Consequently, economists have tended to focus on prices, population and income as the main factors affecting consumer demand.
However, over the last three decades consumer economics became a separate field within the economics science, and theories on demand creation and transformational growth indicate that demand management programs funded by agents in the supply side of the market, that is, producers, processors and traders, can influence consumer demand. According to these theories, producer spending on research and promotion can capture the imagination of consumers. With promotion, it is possible to influence the direction of demand by influencing the pace and direction of technology change and by supplying specific information to consumers about products in the market. Promotion is perhaps the most important non-price component of cotton competitiveness, and the existence of cotton promotion programs is correlated with more-rapid growth of cotton consumption by region.
World cotton consumption was stagnant for almost 15 years, fluctuating around 18.5 million tons per year from the mid-1980s to the end of the 1990s. In contrast, world consumption increased at a strong average annual rate of 2.6% between 1998 and 2003, and is forecast to surpass 22 million tons in 2005. As significant is the fact that world cotton consumption per capita rose to 3.4 kilograms in 2003, after falling from 3.65 kilograms in 1987 to 3.17 kilograms in 1998.
Between 1998 and 2003, cotton consumption increased by 2.6 million tons. An estimate by the Secretariat indicates that 11%, or close to 300,000 tons of additional cotton consumption were the result of research and promotion programs, mainly in the United States, but also in other countries.
With the exception of the United States, cotton promotion programs were greatly reduced or discontinued in industrial and developing countries after 1990. In the United States, cotton promotion and research activities increased from $18 million in 1986 to $47 million in 1994 and $62 million in 2003. As a result, the market share of cotton in North America is estimated to have increased from 34% in 1988, to 43% in 2003. In contrast, in other industrial countries where promotion was not present, the market share declined. In Western Europe, the market share of cotton declined from 37% in 1988 to 33% in 2003, and in Japan, Australia and New Zealand, the share fell from 40% to 37% during the same period. The success of U.S. cotton promotion activities is spilling over to other markets. In 2000, the International Forum for Cotton Promotion (IFCP) was created, and today the cotton industries in several countries are becoming more aware of the importance of promotion. Further, the cotton industry in the United States, through Cotton Incorporated and Cotton Council International, has developed promotion activities in other countries, and these programs help to make consumers in other countries aware of the properties of cotton vis-à-vis other textile fibers.
Another aspect of competitiveness is the relative availability of cotton due to institutional arrangements that define the structure of the fiber market. Research at the University of California during the 1980s suggests that the decline in cotton's market share in industrial countries during the 1960s was associated with the implementation of the Long Term Agreement (LTA) on trade in cotton textiles and apparel. The limits on imports of cotton products under the LTA forced textile importers to market products made with chemical fiber. When the Multifiber Arrangement (MFA) was implemented in the 1970s, cotton started to regain market share, as the arrangement covered both cotton and chemical fibers. Research by the ICAC Secretariat suggests that because of the phase-out of MFA quotas agreed as part of the creation of the WTO in 1995, cotton is gaining half a million tons of additional consumption through 2005, of which 240,000 are estimated to have occurred between 1998 and 2003. ²
Competitiveness is also related to technology change and diversity of uses. New cotton knitting technology developed in the 1980s permitted the incursion of cotton into new segments of the textile market. Until 1990, before the unification of Germany, cotton was used in the eastern part of the country as a raw material in the production of body parts for automobiles. Similarly, the use of polyester resin in the production of plastic containers, which took a 6% share of the polyester market in 1985, represented over 15% of that market by the mid-1990s. Creating a new market for cotton or introducing cotton into an existing product is an area that has not been fully exploited over the last decade. Industrial use of textile fibers requires non-traditional technologies, and most of the advances in market development depend on new technologies from textile machinery manufacturers.
As noted above, increased cotton consumption since 1998 has been supported by lower prices. Cotton prices relative to prices of other textile fibers fell during the 1970s and early 1980s, a period when the market share of cotton increased from 47% to 50%. Relative cotton prices increased between 1987 and 1997, and were correlated with a decline in the world market share of cotton. Relative cotton prices trended downwards again since 1998, and the world market share of cotton declined much less rapidly than in the 1990s. Indeed, in the five years between 1993 and 1998, cotton's market share fell by 6.3 percentage points, but in the five years to 2003, the decline was only 1.9 percentage points.
It is pertinent to ask if the market share of cotton will increase again? Well, maybe in some years it will. In fact, in 2001, as chemical fiber consumption stagnated, cotton consumption increased by 1% and it's market share move upwards that year. Nonetheless, in the long term the market share of cotton is likely to continue to decline because of expanded use of polyester in containers and other non-apparel applications. However, the pace of decline is likely to resemble the decline of the last five years. Research by the ICAC Secretariat suggests that as a result of lower prices and increased non-price competitiveness of cotton, world final consumption of cotton could reach 25 million tons in 2010, accounting for 37.4% of the textile fiber market.
More: Carlos A. Valderrama's bio
¹: ICAC, World Textile Demand, October 1995, Chapter III.
²: ICAC, World Textile Demand, November 2004, Chapter V.