Wednesday, February 16, 2011

Why Does the US Subsidize the Cotton Industry?

** updated 06-16-2011** see below...


So... here is a rant I started writing about 3 months ago...(i start a lot of rants and then...kinda fade out...never quite finishing them :-)  

this one is coming back to life, because it seems the "mainstream" media has just learned of the cotton price issue.

the top stories are that our Hanes Boxers are going to rise $2, or our t-shirts from $9 to $11. 

Perhaps the connection in the massive rise in commodity prices could be linked to the social network revolution which has started in the near east...but will very likely spread to the far east -..... let's get some coverage of that rather than the undergarmet section of the local WalMart please....

Ok - now to the original Rant - 

Cotton, is now the "Fabric of Our Lives", but not long ago, the industry was struggling to survive after losing 50% of it's market share to the miracle fabric Polyester. Cotton Demand Soaring Beyond Supply

From Cotton Inc "In 1960, cotton apparel and home fabrics accounted for about 78% of all textile products sold at retail. By 1975, that share had plummeted to an all-time low of 34%, due to the successful incursion of synthetic fibers [read polyester] in the marketplace, threatening the extinction of cotton as a viable commercial commodity.

"Polyester was first introduced to the American public in 1951. It was advertised as a miracle fiber that could be worn for 68 days straight without ironing and still look presentable." (Source Peter Schwartz)
Historically, cotton farmers ended their involvement with a crop at point-of-sale, confident in the market's ability to take up the cotton crop. But the new competition from petroleum-based fiber producers presented a major disadvantage for cotton, as polyester was aggressively marketed and merchandised at every point throughout the pipeline: from mills and manufacturers, to retailers and consumers.
Reacting to the serious erosion in cotton's consumer market share, producers ...called for a collective national marketing and research effort...the cotton growers were successful in petitioning Congress into passing the Cotton Research and Promotion Act of 1966. The act established a funding mechanism, based on producer assessments, for the purpose of conducting a wide scale effort to recapture cotton's market shareThis funding mechanism led ultimately to the creation of Cotton Incorporated in 1970....

This Act of Congress strikes me as a protectionist measure not against another nation, but against a different industry within the US. Perhaps the government funding was justified as a David and Goliath story, wherein Dupont [NYSE: DFT] and Eastman Chemicals [NYSE:EMN] played the part of Goliath and the individual, small, "mom and pop" cotton farmers were David.
Regardless, 44 years later the US Government is still subsidizing the Cotton Industry "to the tune of about US$3 billion per year." In fact, as Congress cries foul against China's infrastructure investments as unfair trade pratices and subsidies, the US is violating the WTO anti-duping rules left and right, starting with the Cotton Industry. 
From the beginning, Cotton Incorporated adopted a "push/pull" marketing strategy. The objective was to "push" cotton textile innovations into the market through product and process development, while building consumer demand, or a "pull," through advertising and promotion.
By 1983, Cotton Incorporated succeeded in curtailing share decline...Today...cotton share is more than 60% of the marketplace.
The following timeline describes some of the more notable Cotton Incorporated milestones and strategic initiatives, which have helped the company achieve cotton's current share of the home and apparel textile markets"

(BN) Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices 
 November 16, 2010 From Bloomberg News


Gap Inc (NYSE: GPS)., J.C. Penney Co.(NYSE: JCP) and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs. “It’s a little terrifying to deal with cotton suppliers now,” said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker..."

Cotton futures in China have surged more than 70 percent this year...“American consumers better get used to rising prices on the shelves of Wal-Mart (NYSE: WMT) and other retailers,” said Jessica Lo, Shanghai-based managing director at China Market Research Group... ”

Shandong Zaozhuang Tianlong Knitting Co., which makes Polo Ralph Lauren Corp. (NYSE: RL) T-shirts and track suits for Le Coq Sportif Holding SA, has raised prices as much as 70 percent from a year earlier, said sales manager Fred Hu. “If cotton keeps rising like this, we will need to lift prices by 30 percent by the Spring Festival next year or we lose money.”

“We can give clients a price now, but it will only be valid for a week,” said Tianlong’s Hu.

Dahlin Hancock
Updated 06-16-2011
Just catching up on my Planet Money Podcast backlog...and they have a podcast that is very relevant to this rant. 

"Why U.S. Taxpayers Are Paying Brazilian Cotton Growers".

"......In other words, the United States and Brazil are in the middle of a war over cotton. It's an emotional and quiet war complete with global retaliation and a $147 million bribe. It all started with a man named Pedro Camargo...."

"U.S. cotton farmers, Pedro says, get subsidies from the U.S. government that add up to somewhere between $1.5 billion and $4 billion a year.

"We want to compete farmer against farmer," Pedro says. "Not Brazilian farmer and the American farmer with the help of the United States government."
He says the U.S. isn't following the World Trade Organization's rules of global trade — rules that the U.S., Brazil and 151 other countries have agreed to follow."

You can read about it here and listen to the podcast online here.

More links related to this rant:

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