Cotton in woolly times
6-8-2009 | Food and Agribusiness news
When household budgets decline, people will cut back on buying new t-shirts and jeans, long before they cut back on buying food or coffee. Therefore, demand for cotton appears most vulnerable to the current global financial crisis, says a new Rabobank report Global Demand for Sugar, Coffee, and Cotton.
"Demand for commodities which are used to produce non-essential goods and where consumption is more concentrated in industrialised markets will likely suffer. We have seen this happen in the cases of cotton and orange juice," said Rabobank Food & Agribusiness Manager Andy Duff.
Food before cotton
At all economic levels, income elasticity for clothing is relatively high compared to foodstuffs, suggesting that demand for cotton is likely to be sensitive to changes in economic growth.
"Obviously regular purchases of food are essential for consumers, even when times are tight. Regular purchases of clothes are not. Therefore, cotton has been a big loser in terms of the impact of the economic slowdown on demand," said Brazil-based Duff.
In the case of cotton, the commodity price represents only a small value of the final retail price. For a pair of jeans only 6.6 percent of the final value is from the raw material cotton. For a t-shirt, the percentage of the actual price of cotton is even lower at 1.2 percent.
"Cotton is the most complicated commodity and gives the greatest cause for concern. It is very unlikely that lowering cotton prices will have any significant impact on clothing sales or encourage consumers to buy new clothes," said Duff.
Coffee drinkers trading down
The industrialised world accounts for over half of global coffee consumption. Coffee drinking is a habit many consumers may find difficult to stop. "However, to save some money, coffee drinkers may trade down in terms of quality, which could affect sales of premium-priced brands," said Duff.
Global sugar consumption
Rabobank also believes the growth of global sugar consumption will decline, but it will continue to be positive.
"Sugar consumption in industrialised countries is not very sensitive to changes in income, while in emerging markets sugar is often an important source of energy," said Duff. "Demand for commodities that are basic goods, with few real substitutes, such as sugar, is still likely to be relatively robust."
