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The Economics Building

Introduction

One of the most important concepts in economics is the law of supply and demand. Supply and demand can be used to describe transactions at every link in the cotton production chain - starting in the fields where cotton is grown and ending in the store where cotton apparel is sold. Supply refers to how much of a product the market offers and demand refers to the quantity of product consumers are willing to purchase.

Affecting both the amount of supply and the amount of demand are prices. For example, producers will tend to offer more of a product when prices are higher while consumers will tend to purchase less when prices are higher. As a result, prices can be seen as an intersection between the competing interests of producers, who enjoy higher prices, and consumers, who look for lower prices.

The recession has had a significant impact on the cotton supply chain, altering the balance between supply and demand due to the dramatically changing economic conditions. Consumers, who are the ultimate source for all demand throughout the entire textile supply chain, became reluctant to spend with the onset of the credit crisis due to the threat of unemployment. Among the categories of goods most affected by the reduction in spending has been apparel. Virtually all of the apparel sold in the U.S. comes from imports, and the slowdown in consumer demand has had effects observable in import data. Compared to 2008, cotton-dominant apparel imports in 2009 were down 7.3%. In turn, the decrease in imports impacted demand further upstream in supply chains (i.e., fabric, yarn, and fiber) and contributed to the 8.9% decrease in world cotton consumption in the 2008/09 crop year. This decrease in mill demand help push cotton prices lower in 2008/09 as there was more cotton supplied to market than was being demanded.

Lower cotton prices, along with higher prices for other crops that commonly can be grown on the same land as cotton, led to successive declines in world cotton production in 2009/09 (-10.3%) and 2009/10 (-4.8%). This reduction in supply is being met with increased demand as expectations for growth in the world economy have become less pessimistic. An effect of the improved economic situation is rebounding apparel demand. While apparel may be one of the first product categories to face reductions in spending during recessions, it also tends to be one of the first product categories to see renewed demand in recoveries.

An effect of the recession, with its rapid onset and severe effect on consumer spending, was that retailers faced an accumulation of costly inventories during the 2008 holiday shopping season. In response, retailers sharply reduced inventories and cut lead times in order to minimize risk in an environment of uncertain consumer demand. A consequence of this new risk management strategy is that any turnaround in consumer demand should result in a more rapid order placement. Over the past several months, there have been steady month-to-month improvements in consumer apparel spending. Correspondingly, there have been increases in apparel imports. Cotton dominant apparel imports in December were up 7.5% year-over-year and up 2.1% year-over-year in January.

These imports contain cotton and the increase in orders for apparel implies an increase in demand for cotton fiber. With cotton supplies being lower, due to lower cotton acreage, the increase in demand has brought about an increase in cotton prices. Cotton prices have increased about 30% on average compared to their levels in March 2009. This increase in cotton prices is expected to trigger an increase in acreage devoted to cotton - world cotton farmers are expected to increase cotton acreage by 10% or more cotton in the 2010/11 crop year.

This increase in production could help reduce some upward pressure on cotton prices. There is a large production/consumption gap in cotton fiber in the current 2009/10 crop year, which at more than 13 million bales represents almost 10% of world cotton consumption. For a significant and lasting decline in cotton prices to occur, the production increase will have to overcome this gap as well as any increased in world cotton consumption brought about by the global economic recovery.

As a result of all these changes in world cotton markets, 2010 promises to be an interesting year for cotton supply chains. Even with a recovery in place, uncertainty remains regarding the extent of its impact on consumers' willingness to spend on apparel and textile items. Nonetheless, there is plenty of reason to be optimistic. Consumer spending and retail sales of apparel have been increasing as labor markets continue to improve. All of this progress suggests that 2010 should be a more profitable year throughout all links in the cotton supply chain, from the farmer to the retailer.