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Rising Cotton Prices Hurt Small Exporters

The rising cost of cotton has dealt a major blow to the profitability of small and medium-sized cotton exporters. Saddled with heavy input costs, and unable to hedge against price volatility with futures and options contracts, home-based exporters in places like Panipat, India are struggling to survive.

Most major exporters have benefited recently from the weakening of the rupee against the dollar. Smaller exporters, though, have been crushed by the 15 to 20 percent spike in prices over the last few days. And whatever gains have been won by the strength of the US dollar against the rupee have been eroded by cotton’s increasing cost.

Larger exporters protect themselves against the short and medium-term price volatility of cotton through hedging mechanisms. By purchasing cotton futures and options, they can make exports revenues more predictable. Another added benefit of hedging is increased flexibility for cotton-related transactions since futures can be sold even when there are no buyers in the physical market. Smaller exporters, however, rarely have access to these financial instruments.

And there seems to be no end in sight to the uptick in cotton prices. Disastrous harvests in both the US and China and increased global demand have generated what many see as a long term impact on not just cotton but apparel in general. According to Allen Terhaar, executive director of Cotton Council International: “The consumer should not expect to depend on deflation in clothing as we have seen for many years.”

He attributed the swelling demand for apparel to the rapid growth of the middle classes in India, China, and Brazil. Mr. Terhaar said, “The real generators of added demand are the emerging markets. Between now and 2025, we will have 20 million tons of added fiber demand, of which the US is expected to add just 0.5 million tons — whereas China and India are expected to add 14 to 15 million tons combined. This is through the combination of population and economic growth.”

The mounting costs of fuel and transportation, increased foreign competition, and the allure of low wage exporters in countries like Bangladesh have also squeezed smaller exporters in India.

Even some major retailers have experienced disappearing margins as the result of the bump in the cost of cotton. H&M attributed its 18 percent fall in pre-tax profit for the last fiscal quarter to ballooning cotton prices and wage inflation in Asia.