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Organic Cotton in Context

With cotton prices so high and given all the natural disasters in some of the key organic cotton production regions, many in the textile sector are wondering what the impact on organic cotton production will be. To understand the context, let’s first look at growth in the organic cotton sector from 2010 to 2011.

Seeds of change

Bolstered by continued strong manufacturer demand, even during the recessionary times, organic cotton continued its steady growth in 2009 to 2010. In fact, according to the Textile Exchange’s Organic Cotton Farm and Fiber Report, production of organic cotton rose 15 percent from 209,950 metric tons (MT) in 2008-2009 to 241,276 MT (1.1 million bales), grown on 1.14 million acres, in 2009-2010. Organic cotton now represents 1.1 percent of global cotton production. 

Globally, organic cotton production has witnessed a veritable explosion (539 percent increase) over the last five years since 2005-2006, when only 37,000 MT were produced, and Textile Exchange anticipates similar strong growth in 2011. The fiber is grown in 23 countries; India, Syria and Turkey are the world’s leading organic-cotton producing countries, followed by China, United States, Tanzania, Uganda, Peru, Egypt, Mali, Pakistan, Burkina Faso, Israel, Benin, Paraguay, Greece, Kyrgyzstan, Tajikistan, Senegal, Nicaragua, South Africa, Brazil, and Zambia. All 2009-2010 stocks of organic cotton have been purchased as has most of this current year’s crop. 

Price volatility

It is not yet known how exactly the increased conventional cotton prices will affect organic cotton sales. Some organic cotton is being sold on the conventional market if higher prices are offered, says Leisl Truscott, Farm Exchange farm engagement director. As a result, there could be a decline in organic cotton production for 2011 because farmers can get historically high prices for their crops without having to bother with certification and tracking, two essential elements of organic production.

Image courtesy econscious.

Mark Huang, president of Broad Market Solutions, found that “organic cotton pricing increased by a fifty-to-seventy percent range last fall, but the organic price did not go up as fast as non-organic, and is closing the price gap between organic and non-organic cotton prices. In December, we were told by our suppliers that there was almost no gap between the two,” he reports. 

The price of conventional cotton could affect the amount of premiums organic farmers can charge. “We believe that the price differential for organic cotton is going to increase above conventional but not by as high a percentage as in the past,” says Dale Denkensohn, president of econscious, suppliers of organic cotton blanks to the promotional-products industry. “It could be a differential of twenty-five to thirty percent, but not the fifty percent it sometimes was in the past. It is important to realize that there are no fixed international rules that benchmark organic cotton prices. Rather, prices are fixed by market conditions and commodity traders,” he noted.

According to LaRhea Pepper, Textile Exchange senior director, “Most organic cotton projects are linked to the conventional cotton price yet include a ten-to-forty percent or more premium, depending on whether the farm group is paying for certification, internal control systems and other requirements. Other projects work on a five-year average and some are decoupled from conventional and working on a fair-pricing model,” she stated. 

Organic cotton pricing increased in the fall of 2010 but did not go up as quickly as traditional cotton. The price gap between the two is closing. (Image courtesy Royal Apparel)

While the issue of premiums and overall pricing is the hot topic, the price of cotton (and ultimately one of the key factors in the decision of to whom to sell) is not just a dollar value. Many companies have built long-term relationships with farmers, providing a consistent commitment that farmers can bank on which will last longer than the initial amount. For example, rather than sell to a fly-by-night buyer just to get cash, many organic cotton farmers are choosing to work with companies that have provided long-term commitments and helped build the schools, drip irrigation systems, libraries and clinics in the farmers’ communities. 

Impact of natural disasters

Many are also wondering what impact recent floods and droughts will have on the availability of the organic cotton supply. “Organic farming is part of the solution for climate change and many of the other pressing problems of our time,” says Helmy Abouleish, vice-chairman and managing director of the Sekem Group in Egypt. 

Maria Rodale, CEO and Chairman of Rodale Inc. and author of The Organic Manifesto, agrees that organic production can help mitigate the impact of natural disasters, including floods and drought. “Organic agriculture uses less water, does not rely on expensive fertilizers and pesticides, helps to sequester carbon in the soil, and provides a fair livelihood for people in disadvantaged communities,” she says. 

The problem is not just about the prices or natural disasters; it can also be a problem of political interference. India grew more than 80 percent of the organic cotton produced globally with just one state, Madhya Pradesh, growing two-thirds of the country’s organic cotton. Having so much organic cotton production in just one country makes the organic cotton market unbalanced and captive to the whims of governmental interference. For example, India has already suspended the export of cotton fiber and yarns, making buyers look further afield to Pakistan, China and Africa.

Natural disasters, as well as political disturbances, know no boundaries, underlining the need to have production regions located worldwide in a balanced fashion. Increasing organic production in the U.S. would help in terms of keeping costs to domestic buyers down, but no land is immune to the risk of natural disasters. Some farmers overseas may rebuild their fields and transition to organic production at the same time, but such a move is not universal.

Images below courtesy Broder Bros., Co.

Natural horizon 

While the entire conventional and organic cotton value chain is watching every step of the cotton pricing situation, no one can foretell the future and what it means for finished apparel and home textiles. 

Some leading retailers will be holding the line on prices. However, other organic cotton users, particularly smaller companies, may have to pass the price increase on to their customers, depending on how long the higher prices last. “Some of our organic cotton suppliers have kept prices down because they bought when the market was much lower and have the fiber in stock. However, there is no doubt that organic cotton products will need to increase in price in order to account for the current high prices and potential increases in the next crop,” notes Susie Hewson, Natracare’s international sales and marketing director.

Under the Nile’s Janice Masoud agrees. “We are paying double for the twenty-ten harvest versus the two-thousand-nine harvest. Consumers at retail are going to see at least a thirty percent increase, if not more. However, it’s important to note that the price increases will be across the board for both conventional and organic cotton. Many manufactures of organic cotton have fair trade programs in place, which means that the price of organic cotton that was already higher than conventional cotton will be even higher.”

In addition, with such high prices, we could see an overall reduction in the use of cotton, whether conventional or organic, due to price increases. Price-sensitive customers could be unwilling to pay higher prices. 

Says Textile Exchange’s Truscott, “It’s not so much a question of whether organic cotton farmers will grow their cotton organically or not. Thankfully, the well-established ones—of which there are many—will continue their organic practices. It’s more a question of to whom they will sell it. The chances are—and this is the risk for brands and retailers with an organic cotton agenda—that organic cotton producers will not wait around for an organic customer to appear. If a conventional cotton trader, or anybody for that matter, offers them a good enough price, they are likely to take it. Some sources suggest that over the past few months as much as fifty percent of organic cotton has entered non-organic supply chains.”

The best bet for manufacturers is to develop a forward contracting system and close relationship with farmers located around the world that will weather all such crises. “Brands interested in nailing down their supply need to build organic cotton supply security into their planning strategies now, preferably by implementing forward contracts,” stresses Truscott.