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COTTON EXPORTS SLIP ON PRICING ISSUES
BY AMENA BAKR
Flip over the label of any Armani shirt or Dior
top and you’ll probably find it’s made of Egyptian cotton.
While Egypt is a bit player in the world cotton market, its name
has become synonymous with the finest cotton. Last year, it accounted
for 40 percent of the world’s high-grade cotton – the
type used to make the most comfy T-shirts, soft yet durable towels
and those heavenly 600-thread bed sheets.
Over the years, the cotton industry has been a rollercoaster ride,
but this year is shaping up to be a freefall. So far this season,
which began on September 1, cotton export levels at press time were
230,000 qantars (11,500 tons) versus 880,000 qantars (44,000 tons)
at the same time last year, according to Mohamed Al Shewi, the government’s
representative at the Egyptian Cotton Exporters Union. “The
reason we are seeing such a huge drop is because farmers are no
longer willing to grow cotton since it has a limited profit and
takes too much time to grow,” he told Business Monthly.
The cotton industry is as cumbersome as the bulging two-meter-high
burlap sacks that pillowy fiber is traditionally shipped in. While
wheat and rice can be harvested after just three months, cotton
farmers have to wait nine months for their crops to produce a marketable
commodity. “Cotton is just like a baby, and requires the same
kind of attention from the farmer,” remarks Shafik Gomaa,
a market specialist at the Alexandria Cotton Exporters Association
(ALCOTEXA), a nonprofit umbrella for cotton exporters.
Traditionally, the price of cotton was determined by the government,
which purchased it from farmers then exported it. The government
set the floor price at the start of the season and usually stuck
to it, a tactic that critics said allowed international competitors
with more market-oriented systems to undercut its prices. As a result,
Egyptian traders were often left with a surplus at the end of the
season, which entailed storage costs and quality loss.
In 2004, the government replaced this system with one more responsive
to international price fluctuations. Today, traders set the prices,
negotiating first deals with farmers at the start of the season,
then determining their export prices according to ever-fluctuating
international market prices.
Egyptian traders are still new to the game and lack the experience
of their foreign counterparts, a shortcoming that often costs Egypt’s
600,000 cotton farmers dearly. “The market is like a jungle
and in order to survive you have to provide it with good quality
and low prices,” Al Shewi says. “Unfortunately, we don’t
have this combination.”
So far this season, cotton farmers have lost an estimated $60 million
due to the drop in exports. Al Shewi places the blame squarely on
the shoulders of cotton traders, who he accuses of tampering with
cotton prices. “What’s different this season is that
many of the businessmen who buy the cotton from the farmers forced
them to sell at a very low price so they could raise the export
price and no doubt benefit from the difference,” he says.
He explains that last year Egypt’s prized long-staple GIZA
86 was sold by traders for $1 per libra, versus this year’s
price of $1.10 per libra. The price difference may seem modest,
but adds up quickly when buyers order in bulk. More critically,
it puts the price of Egyptian cotton above competing varieties.
“Certainly the increase of the price made many of our regular
export clients hesitant to buy when they have the option of buying
almost the same quality of cotton for cheaper prices from other
countries,” Al Shewi says.
American PIMA cotton, Egypt’s chief rival in international
markets, is currently selling at prices about 5 percent lower than
its Egyptian counterpart. Moreover, Egyptian traders demand payment
within three months of delivery, a practice that discourages some
buyers. “Exporters here in Egypt only allow clients up to
90 days to pay for the cotton, while other countries extend this
period to encourage buyers,” said a cotton analyst who spoke
to Business Monthly on the condition of anonymity.
To many buyers, the billing period is every bit as important as
the price. This is evident in the fact that Asian countries including
India, Pakistan and China are buying cotton from Egypt and reselling
it, with a significant markup, to European countries with a longer
payment grace period. “If this continues to happen we will
soon have a total loss of the one product that we could potentially
have an edge in on the international market,” the analyst
warns.
Gomaa, on the other hand, believes the real threat is more insidious.
He says demand for long-staple cotton is decreasing as Asian industries
flood the world market with low-quality clothes. “We are moving
towards a trend of wearing low-quality clothes, so this has made
many of the international fashion houses move towards importing
larger quantities of lower-quality cotton from India and Pakistan,”
he says. “Very few people right now care about having the
best cotton wear, so you’ll find people these days wearing
jeans to a wedding.”
While it’s uncertain if this cheaper cotton trend will continue,
it has allowed short-staple cotton producers in Asia to influence
the market price of long-staple varieties. Asian traders are selling
large volumes of short-staple cotton at low prices, driving down
the market prices of high-grade brands. “This is what we call
dumping, and the Chinese are experts in this game,” says Gomaa.
“That’s why we need the help of our government to support
this industry.”
Currently the government does not offer any direct support or subsidy
to the cotton industry. “Most [cotton-producing] countries
allocate part of their subsidy budget to support the growth of cotton,
but this doesn’t happen in Egypt,” complains Gomaa.
The only direct incentive the government does give to cotton farmers
is a discount on the purchase of pesticides. “This is not
enough. We need the government to get involved in making sure the
traders in the market give the poor farmers their fair share of
profits.”
The analyst disagrees. “The government has too many responsibilities
at the moment and will never do a good job at monitoring the activities
of the market; that’s why I think the solution has to come
from the traders themselves,” he says. He expects that this
year’s marketing failures will give the local traders something
to chew on. “I am quite sure that this year’s season
will have an impact on the coming one, but at the same time lessons
always have a cost.”
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