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  • 4.2-COTTON TRADING-THE CHANGING ROLE OF COTTON MERCHANTS

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  • The changing role of cotton merchants

    Chapter 4 - Cotton trading - The changing role of cotton merchants 

     
     
    The global cotton industry has never before experienced a period of change, development and evolution such as the current time.We are witnessing a rapid change in production practices and capacity through technology and newly developed regions, an increase in market information availability and efficiency, shifts in the manufacturing and processing advantage, and an evolution in the function and role of the cotton merchant.

    How has the role and function of the traditional cotton merchant changed?

    In the past, the cotton merchant profited by keeping ahead of the information curve. This practice is no longer what it used to be, thanks to the introduction and adoption of global information systems that allow market participants to access weather, supply and demand, and pricing information in real time. Market participants are now on a level playing field, in effect.

    While merchants could become gloomy about how this information windfall is preventing them from staying in the cotton business, the reality is that by changing their focus and revolutionizing their business model they are able to create value by becoming integrated global cotton supply chain managers. The objective of the global cotton supply chain manager is to add value to each part of the process from production through to the mill door.

    Managing the supply chain starts, as one would expect, with the production of raw cotton. By providing crop inputs such as fertilizer and funding to the cotton farmer, merchants can ensure the producer has the proper resources to achieve the highest possible yields and quality. Merchants combine this finance service with marketing facilities that assist the farmer in managing production and price risk. They position themselves as the preferred buyer for the farmer’s crop. This provides substantial advantages in managing quality and delivery that eventually benefit the cotton mill buyer.

    Once the crop is produced and ginned, having warehouse and logistics facilities under management ensures additional quality control and allows merchants to better service the mill customer with just-in-time delivery or specific quality requirements.

    The warehouse business is often split between origin and destination. An example of destination warehousing is the consignment business in bonded areas in China; this service allows the Chinese mill customer to better manage cash-flow and quality by having a menu of actual cotton to choose from. This service is another innovation of the supply-chain minded cotton merchant.

    While these concepts are already ‘in the market’, few cotton merchants have fully integrated each stage to ensure customer quality, price and service. For cotton merchants to remain relevant in today’s markets, they need to focus on being integrated supply chain managers.

    What about the future of supply chain developments? How will the cotton merchant remain relevant in the future?

    Technology in the cotton business includes additional improvements in genetics and crop production practices leading to increased yields and improved quality. There remains a significant difference between high and low global performers when it comes to yields. As technology is used more and is better implemented, average world yields will increase substantially as a result of a rapid improvement in the relatively low yielding producers.

    As yields increase, the need for capital will increase also as increased crop inputs must accompany improved production practices. The cotton merchant has an expanded role to play in this area, which is a snug fit with the supply chain structure. Providing access to capital where it will be needed most in the coming years will require sophisticated financial engineering that will in turn require the cotton merchant to expand know-how beyond current convention.

    Capital will also become a tool that the cotton merchant can use in better servicing the cotton consumer sector. This is not to suggest that cotton merchants will begin investing in cotton spinning mills but that by ‘partnering’ with their consuming customers they can provide additional liquidity for customers to use their own capital more efficiently and effectively. This side of the business is in the very early stages of development and has exciting prospects.

    Technology also includes risk management skills. These have tangible value to both producers and consumers, and until now have not really gained traction, particularly on the consumer side. This will have to change in the future as macro conditions become more uncertain generally.

    In the past, world class cotton merchants mostly subscribed to quality, service and price as the foundations of successful business. They must now include technology and capital contained in an integrated supply chain to remain relevant and useful to the industry into the future. Overlying this evolution and, more importantly, allowing merchants to achieve this strategy, are direct relationships. Direct relationships with producers and consumer are important, and in fact necessary for cotton merchants to successfully implement a supply chain strategy.

    Direct relationships allow the merchant to better understand and manage the needs of the producer and consumer and more importantly allow them to add value to a client’s business. To be and remain relevant and viable in the long term, merchants must be committed to the integrated cotton supply chain business and direct relationships with producers and consumers.