Cotton Crunch in U.S.

Cotton, the marketing favorite and a go-to fabric in home textiles, is beginning to strain under global supply and pricing pressures. The home furnishings industry uses about 28% of the overall cotton produced, and despite record levels of demand for cotton — in 2006, the United States consumed about 38.3 pounds of cotton per person, according to figures from Cotton Inc. — farmers are growing less cotton and turning their attention to more lucrative crops.

Corn (with a fresh push for ethanol), wheat and soybeans are among the alternative crop choices as their prices rise at a greater pace than cotton. And even pomegranates, as was the case on at least one California farm, according to the Supima Association of America, are displacing some of the Pima cotton crop.

In fact, when all is said and done, most industry watchers anticipate the United States will have about 28% fewer acres of cotton plantings this spring.

This is happening in the midst of unprecedented worldwide demand, particularly from China, where consumption is increasing at record levels. According to Gary Raines, manager, economics and analysis, Cotton Inc., the organization has always had rich research on U.S. consumer trends, but a few years ago began looking at the Chinese marketplace as well, and the huge impact that it can and will have on the global economy.

Marc Lewkowitz, evp, Supima Association of America agrees. "China itself can't keep up with the demand, and imports a good amount of raw cotton," he said. "We export about 90% of our cotton, but it comes back to us in the form of finished products."

According to the National Cotton Council (NCC) the annual values of U.S. cotton sold overseas recently have averaged more than $3 billion. The United States commonly supplies 7 million bales or more of the world's cotton exports, accounting for about 25% of the total world export market. The largest customers for U.S. raw cotton are in Asia and Mexico. In a January update, the NCC noted that world production of cotton was estimated at 118.3 million bales, down 510,000 bales from December.

While other countries have increased the production of cotton, it does not necessarily offset the shift in U.S. production. According to Raines, one country to watch is India. "India is seeing an increase, but not so much as a result of the decline in U.S. acres," said Raines. "The big reason behind the increase in Indian production is more attributable to increases in Indian yield per acre, more so than increases in planting. The increase in yield is directly due to increased penetration of genetically-modified cotton seeds being planted."

According to recent news reports, some of that Indian cotton has been designated for export to Pakistan, where a poor crop has resulted in a significant cotton shortfall for the country.

For the U.S. home textiles industry, cotton had become an easy choice as its prices for raw cotton have remained low. Cotton has also often been used as part of a blended fabric to offset the rising cost of synthetic fibers — which tracked the increase in oil prices, noted Raines.

With cotton prices likely to increase as supply decreases, the amount of cotton or cotton-blended goods may see a decline in volume and an accompanying increase in prices for raw materials and, ultimately, finished goods. The worst case scenario is a steep rise in finished goods prices, which will certainly not be easy to get past many tight-fisted retailers, causing even more margin strain for vendors.

"There are no bargains out there," noted Gregg Haft, ceo of Fayette. "Many of our products are either 100% cotton or 100% microfiber polyester. We're not changing our constructions." According to Haft, even more troubling than any anticipated cotton shortage is a weakened dollar, which is having a major impact on the textile industry all over the world.

For Lewkowitz, the short-term issues are not a death knell. If prices rise, as they are likely to with supply low, he reasons that farmers will again see cotton as a lucrative crop alternative.

Raines also sees four major issues impacting the status of cotton, each of which require a wait-and-see stance: 1) the levels of spring plantings; 2) the Farm Bill now being discussed in Washington and how it will address subsidies for planters; 3) the election and the trade policy of a new administration; and 4) the strength of the dollar, which is a source of concern around the world.