• back
  • 5.3.6-MARKET SEGMENTS-FUTURE DEVELOPMENT OF THE ORGANIC COTTON MARKET

  •  
  • Future development of the organic cotton market

    Chapter 5 - Market segments - Organic cotton: an opportunity for trade 

     
     

    In order to develop a better idea of the future prospects of the international market for cotton products, a holistic view of the entire fibre-to-clothing value chain is needed. This chapter examines the arguments for and against expanding production of organic cotton, at each stage in the chain, as well as the strengths, weaknesses, opportunities and threats of the industry.

    Arguments in favour of expanding organic cotton

    Production
     

    • Organic cotton is in demand. Production and trade increased 70% per year on average between 2001 and 2006, and have more than doubled annually since 2004.
    • Cotton is an important rotational crop for many organic farmers in the world. Its cultivation will increase with growth of the market for organic produce.
    • The additional production costs of organic cotton may be limited in systems with multiple organic crops, while overhead costs can be shared between various crops.
    • Organic cotton production also has potential in production systems where cotton is the main cash crop or the sole cash crop. Here, market prices, access to information and production efficiency are important parameters in farmers’ decision-making about whether to convert to organic production.
    • The infrastructure for organic cotton training and extension is expanding. Much can be learned from training and extension approaches for integrated pest management (IPM) and integrated crop management (ICM).
    • Improved access to information technology is facilitating the exchange of experiences, expertise and ideas for organic cultivation methods, as it is for marketing of the organic produce.

    Processing 

    • Many spinning and textile mills around the world are involved in organic cotton processing. This favours economies of scale in processing.
    • Blending organic cotton at some minor percentage at the level of spinning is an effective way to increase fibre demand at low cost.
    • Infrastructure for the knitting of organic cotton is well established, more so than for weaving, because of the lower minimum quantities required per production run. Brands and retailers generally start with the production and sale of knitted items when first engaging in organic cotton usage.

    Retail 

    • The concept of ‘organic cotton’ is successfully being marketed to brands and retailers in the fashion industry as being part of their policies for CSR.
    • The new involvement of large brands and retailers increases the number of points of sale exponentially, making organic cotton items available to consumers in the usual points of purchase for textiles and clothing. Organic cotton items are increasingly found in regular sale channels such as high-street fashion shops, department stores, and supermarkets.
    • The involvement of large fashion brands and retailers in organic cotton use generates much attention from other parts of the textile industry, from designers and from the media. This further strengthens consumers’ interest in organic cotton textiles and clothing, and their willingness to purchase.

    Infrastructure 

    • Demand for organic products has become significant in the main consumer markets (United States, EU, Japan), even when market share is still small.
    • Textile and clothing brands and retailers are increasingly aware of, and responding to, the need for comprehensive CSR policies.
    • The organic cotton sector consists in a network of brands and retailers and international NGOs on environment and development, the latter often with financial support from public funds.
    • Organic Exchange provides an active and productive platform for exchange between businesses involved in organic cotton.
    • Communication to consumers of the involvement of brands and retailers in organic cotton use is organized by the brands and retailer themselves.
    • Fair trade cotton creates a unique opportunity for smallholder farmers, including organic cotton producers, to increase their visibility, their income and their development.

    Arguments against expanding organic cotton

    Production
     

    • The demand for organic cotton fibre currently outstrips supply. Supply growth is lower than demand growth.
    • About half of global organic cotton is produced by two single projects – one in Turkey and one in India. This points to a fragile market.
    • Easy options for production expansion were available a few years ago, when the market for organic cotton was much smaller than the market for other crops in the organic production system. Cotton could then relatively easily be added as a rotational crop. This is less the case today.
    • Organic agriculture provides technical challenges to ensure appropriate yields and income. Conversion to organic takes time, knowledge and expertise.
    • During the conversion to organic agriculture farmers are usually not rewarded with a price premium for their in-conversion produce. Organic farmers face significant financial risks in conversion.
    • Conversion to organic will be easier in some production areas than in others – technically, organizationally and socio-economically. Decision-making about the promotion and development of global organic cotton production should take account of this.
    • The conversion to organic farming tends to be more difficult and more expensive in areas where conventional farming relies upon a high use of synthetic inputs, as the yield drop in organic will generally be higher.
    • The growing importance ofGMcotton in the world creates direct additional costs for organic cotton production, because of the separation between fields that is required to prevent contamination.
    • Organic crop management techniques are an amalgamation of methods, many of which are little understood by both science and farmers. Research is urgently needed to understand, support and strengthen the organic cotton sector.
    • The premiums paid under fair trade cotton production make it more difficult to motivate conventional farmers to convert to organic. They lean towards the higher fair trade price, as the additional organic premium is comparatively lower.

    Processing 

    • Organic cotton fibre, yarn, fabrics and garments cannot be distinguished from conventional ones, and generally not even fromGMcotton, other than through documentation about production lots and volumes.
    • The additional costs of blending organic cotton at low percentages have thus far not been rewarded by brands and retailers through price premiums. The involvement of spinning mills has been more or less imposed upon them by brands and retailers.
    • Woven organic cotton items are not yet very common in the marketplace. Minimum quantities in weaving are much higher than for knitting, thus increasing financial risk.
    • Spinning is capital-intensive and requires high minimum quantities of fibre. Smallholder producer organizations do usually not have an influence on the processing of their cotton fibre, which is a bottleneck for increasing their influence on, and participation in, the cotton textile chain.
    • Labour issues in processing (spinning, weaving/knitting, dyeing, mercerizing, confection) are not currently considered in the organic rules and regulations.

    Retail 

    • Organic cotton demand currently outstrips supply.
    • The involvement of large brands and retailers is motivated more by CSR considerations than by expressed consumer demand.
    • Many brands and retailers do not advertise to the general public their involvement in organic cotton, because the organic quality of the product is only an additional feature in consumers’ purchasing decisions.
    • Sales agents of brands and retailers involved are often highly uninformed about the very existence of the organic cotton items for sale, and about what organic cotton means and implies. They thus cannot and do not sell it.
    • The positioning of 100% organic cotton items should be at price levels close to conventional cotton, in order to generate volume.

    Infrastructure 

    • The cotton crop is not adequately covered by public organic regulations in the main consumer markets (Europe, United States, Japan).
    • There are no regulations in place to ensure that organic cotton items sold to consumers actually carry organic cotton fibre, other than several private schemes which have not yet found large recognition in the marketplace.
    • The organic cotton sector is not yet well recognized by the international cotton community despite the increasing involvement of large brands and retailers.
    • With organic cotton demand outstripping supply, prices are likely to go up. This increased price differential between organic and conventional cotton enhances the opportunity for profit-making and consequently the risk of cheating.
    • The second-largest actor in the marketplace (Nike) claims to be committed to third-party certification, however only part of the supply chains is covered (up to the spinning mill). There is no third-party certification for other processing stages.
    • There are no comprehensive mechanisms in place that back up the claims made by brands and retailers about the amount of organic cotton fibre they use.
    • The Organic Exchange Blended Standards and related certification act as a track and trace system that is internal to companies that sign up. No actor can establish whether the data provided are in accordance with reality.
    • The concept of ‘organic cotton’ as understood by the general public is to a large extent built upon information about cotton production systems (health, environment, socio-economics) that form only a minor part of organic cotton production. Africa’s situation is often over-publicized in the media.
    • Organic cotton production as such has not yet proven to be an economically attractive alternative for conventional farmers in many areas in the world.
    • Public support for organic cotton market development is usually justified by concerns about smallholder farming in poor countries (for example in Africa). However, this support may well lead to the promotion of production by middle income countries (such as Turkey) or large-scale producers (Australia, United States).

    Opportunities

    Production
     

    • Organic cotton production has potential in areas where cotton is the main cash crop or the sole cash crop, as long as market prices, access to information and production efficiency are ensured.
    • Organic cotton projects in countries in the South may aim for participation in fair trade to receive a higher price for most or part of their produce.
    • Fair trade cotton growers have a higher probability of becoming organic fair trade producers than conventional producers, because of their more frequent linkage with consumer markets. Fair trade cotton eliminates the use of the most toxic and dangerous cotton chemicals in production.
    • Farmers produce seed cotton not cotton fibre. With demand outstripping supply in the next few years, organic cotton fibre prices may increase. This would create opportunities for producers and their organizations to claim higher producer prices for seed cotton.
    • Brands and retailers continuously develop and refine their CSR policies. The probability is increasing that they will in future go beyond issues such as energy, environmental performance and labour conditions, to also include specific attention to the fate of producers in resource-poor Africa.

    Processing 

    • Organic cotton demand will continue to grow in the future, thus increasing the number of spinning and textile mills involved, and enlarging the range of intermediate and end-products available to the industry and to consumers.
    • With demand outstripping supply, organic cotton prices are likely to increase. This creates opportunities for processors to increase the price of organic cotton yarn, fabrics and garments beyond the additional production costs of organic cotton.
    • Brands and retailers using organic cotton are likely to be among the first to welcome and implement globally agreed standards for organic textile processing.* Organic textile processing is a logical next step adding value to organic fibre use.

    Retail 

    • The importance end-consumers attach to health and ‘wellness’ is likely to increase in time, to the benefit of organic agriculture and trade.
    • Price differences between organic cotton items and conventional items may decrease, because of more efficiency in processing (higher-volume production runs, etc.), and following increased product availability. Organic cotton items may evolve in the marketplace from being a speciality item towards becoming commonly available goods.
    • Consumer information about the organic nature of organic cotton items (for example through labels inside, hang-tags, consumer brochures or advertisements) is still in its infancy. New strategies and tools may be developed by brands and retailers to cash in on their involvement in organic cotton, improving their image and profile among consumers.
    • The growing interest in CSR issues throughout the cotton textile production chain may eventually lead to the development of a global system of textile labelling inside clothing that incorporates the production history of the item.
    • The value of the cotton fibre contained in textile and clothing items makes up only a small part of their retail value. As such, the textile and clothing industry has room for manoeuvre to incorporate a higher producer price for fibre input.

    Infrastructure 

    • High-profile brands and retailers are not likely to take the risk of making unsubstantiated claims about organic cotton usage without adequate documentation, control and certification.
    • High-profile brands and retailers will increasingly require information from their suppliers about the production and processing conditions in the cotton textile production chain.
    • Documentation of the social and environmental aspects of cotton production and processing may eventually become the norm in the cotton and textile production chain.
    • With demand outstripping supply, brands and retailers may increasingly become involved in the development of organic cotton conversion programmes in producing countries, in order to ensure their access to organic cotton supply.

    Threats

    Production
     

    • Demand for organic cotton fibre depends on the reliability of the claims made about its ‘organic’ origin and production. Transparency of the chain is thus far often limited to qualitative information (who works with whom).
    • The organic cotton sector does not seem to be able, now or in the near future, to meet the current explosion of interest in purchasing organic cotton fibre, yarn and fabrics. If demand cannot be met, the image of the organic cotton sector will be affected and many newcomers may lose interest, and prefer to focus on the use of other sustainable cottons.
    • Organic cotton will not be accepted by many brands and retailers as the only way to move towards better CSR policies. Interest in other, additional approaches such as ‘Better Cotton’, ‘cotton from origin’ (whether United States, Peru, Africa, or similar), IPM or ICM cotton is expected to grow over the next few years.

    Processing 

    • There are no clear mechanisms to bind spinning and textile mills to voluntary networks such as Organic Exchange, or to third-party certifiers, and to thus have some sort of internal control over usage claims and their substance.
    • Once organic cotton has become a common good and is taken up also by medium- and low-profile brands and retailers, the opportunity for cheating by spinners and textile mills may increase. Medium- and low-profile brands and retailers run a higher risk of fraud by suppliers.

    Retail 

    • Selling organic cotton items may remain a one- or two-year fashion trend for some brands that are in the marketplace today.
    • It remains to be seen whether brands and retailers that explicitly promote 100% organic cotton items as ‘organic’ will be able to sustain sales and involvement after one or two years. Fashion is ephemeral in its tastes. Organic, however, is a feature that is not.
    • Blending is an approach that provides new brands and retailers with an easy entry to the organic cotton sector. It is relatively easy to accomplish without too much cost. Blending contributes to achieving NGO approval for CSR policies, and it may also provide free publicity. From the perspective of the organic cotton sector, there is a risk that blending only a small percentage of organic cotton would be a substitute for a more profound involvement in organic cotton use by brands and retailers.

    Infrastructure 

    • Brands and retailers develop CSR policies out of longer-term concerns. Organic cotton use can be part of that, but does not have to be. Brands and retailers may well opt for other cotton purchasing policies.
    • Organic cotton usage creates a lot of free publicity for involved brands and retailers and NGOs. Longer term issues such as building a strong market and supporting the very farmers that grow organically may be disregarded at times by the symbiotic bond of businesses and environment and development NGOs.
    • Publicity for the involvement of larger brands and retailers in organic cotton is often premature, happening at the announcement of involvement rather than on sale of the items.
    • Until recently, brands and retailers were not used to dealing with actors in the cotton textile chain other than the garment manufacturers. Many of them are now starting to be interested also in the origins of the goods they buy. It is not likely, however, that many will go as far as committing in the shortto- medium-term to supporting specific organic cotton production projects.
    • With demand for organic cotton fibre increasing, cotton traders and ginners will express a growing interest in setting up their own internal infrastructure for organic cotton production and trade.
    • Organic agriculture will increasingly be confronted with the risk of contamination byGMorganisms, asGMcrops are progressing today even in reluctant consumer markets (such as Europe) and producer countries (such as West Africa).

    Conclusions

    Corporate social responsibility (CSR) is increasingly shaping the policies of brands and retailers in the textile and clothing industry. As companies become aware of the impacts conventional cotton production has on farmers and farming communities, they consider alternative cottons, to serve consumers and to improve their public image.

    One of the alternatives to conventional cotton fibre production is organic cotton production in which hazardous chemicals are no longer employed – this to the benefit of farmers, workers, domesticated animals and the environment. The first certified organic cotton was produced in Turkey and the United States in the early 1990s. In 2006, organic cotton was produced in 22 countries worldwide.

    Organic cotton production

    Global production and trade in organic cotton was estimated at about 23,000 tons of fibre in 2006, against 6,000–6,500 in 2001, and 10,000 tons in 2004. Production growth thus was an annual 70% over the period 2001–2006, reaching 120% per year since 2004. Despite this impressive growth, traded organic cotton fibre still represents only 0.09% of the 24.8 million tons of cotton fibre traded worldwide.

    Organic cotton production is concentrated in Turkey (10,000 tons of fibre, 43% of the world total) and India (6,500 tons, 28%), where growth has recently also been most spectacular. Together they produced more than 70% of the world organic cotton supply in 2006. Other relevant producers in terms of volume are China (1,750 tons, 8%), the United States (1,500 tons, 7%), African countries (1,800 tons, 8%) and Peru (750 tons, 3%). Countries that have started or restarted organic cotton production include Australia, Burkina Faso, Kenya, Kyrgyzstan, Nicaragua, Pakistan, South Africa and Zambia.

    More than half of the global production of organic cotton fibre is in the hands of just two companies: Mavideniz in Turkey, with about 8,000 tons of fibre in 2006 (35% of the world total) and Eco-Farms in India, with 4,000 tons of cotton fibre in 2006 and an estimated 6,000–7,000 tons of fibre in 2007. This high concentration of production in two single projects points to a fragile market, and to a vulnerability of supply. The performance of these two projects in terms of quality, price, reliability of supply, control and certification, and transparency, may determine the future of the global organic cotton market in the short and medium term.

    Expansion of organic cotton production is required in order to meet the demands raised with brands and retailers in the textile and clothing industry. Easy options for production expansion were available a few years ago, when the market for organic cotton was lagging far behind the market for other crops in the organic production system. Cotton could thus relatively easily be added as a rotational crop.

    In the near future, cotton may eventually become the motor for agricultural change, inciting farmers to convert their land to organic agriculture because of a relevant market for organic cotton. Demand growth will need to be sustained for that to occur.

    Organic cotton production in Turkey is expected to increase further, also thanks to the introduction of national subsidies for organic agriculture. Production in India is expected to increase rapidly over the next years, particularly when and where produce can be sold as organic fair trade. Production can also be increased in Africa, but infrastructure for large-scale projects is yet to be build. Information about the production potential in China is difficult to obtain, but growth is expected. United States production will likely continue to lag far behind United States demand.

    Conversion to organic agriculture is not easy. It takes knowledge, time, investment, and a lot of motivation and organization. Markets can incite conversion only in part through demand growth. Farmers and their organizations need support to build capacity to convert to organic agriculture, in particular in order to bridge the conversion period and related risks of production.

    Organic cotton processing

    The infrastructure for processing organic cotton fibre has improved tremendously over recent years, thanks in part to the awareness-raising of spinning and textile mills that was induced by the blending programmes of large brands and retailers. Today, virtually any quality of yarns and fabrics can be produced from organic cotton.

    The processing of blended yarns (about 5% organic) has been little rewarded thus far by brands and retailers, and therefore is less interesting to spinning and textile mills than producing 100% organic cotton items. However, blending helps mills to learn about organic cotton and to obtain access to sources of organic cotton fibre.

    Demand for organic cotton fibre is outstripping supply today and will continue to in the near future. This creates opportunities for the processing industry to increase the price level of yarns, fabrics and garments, and to augment profit margins on organic items.

    Consumer demand for organic cotton textiles and clothing will increase now that items are for sale through regular sale channels and in regular qualities and designs. The industry will progressively include the environmental and health aspects of textile processing in their CSR policies.

    Retail of organic cotton items

    Demand for organic cotton fibre is outstripping supply today, and is likely to continue to do so in the near future. The marketing of ‘organic cotton’ as a concept has been so successful over the last years that new entrants risk becoming rapidly disappointed by lack of product availability. This might generate a loss of interest in organic cotton among some of these new brands and retailers. The shortage of supply could also result in organic cotton items being positioned in higher-priced market segments.

    Around 50%–60% of the global organic cotton fibre is taken up by some 25 large brands and retailers, with the rest feeding into the sales of medium and small-scale specialized retailers of organic cotton textiles and clothing.

    Current demand for organic cotton fibre is particularly induced by CSR considerations. Many brands and retailers engage in organic cotton fibre use in order to seek approval and publicity from environment and development NGOs, investors, governments and consumers. Companies’ communication to end-consumers about their organic cotton involvement is often still limited. Some brands and retailers do not want their products to be associated with organics, while their textile and clothing items are sold on other features: image, design, colour, fit, price, etc.

    In any case, the CSR-induced demand is an important stepping stone towards consumer-led demand for organic cotton textiles and clothing, while increasing general awareness and product availability. Consumer-led demand will have to be the basis in future for the development of global organic cotton production and trade.

    The promotion of organic cotton fibre as a product originating from organic farming systems relates to agricultural change. The aim of actors in the organic cotton sector should be to increase the benefits of organic farming to producers, and to smallholders in particular. Organic cotton can be a tool for rural development.

    Infrastructure of the organic cotton market

    Today’s market for organic cotton has been shaped by a coalition of large brands and retailers, organic cotton producers, and supporting environment and development NGOs. There are powerful trade-offs between these three parties.

    The brands and retailers express demand, and they motivate and push the processing industry into organic cotton use. The organic cotton producers generate produce in spite of the complexities of organic farming and of a sometimes hostile social environment. Environment and development NGOs, in turn, provide brands and retailers with very valuable third-party endorsement of their CSR policies. They generate free publicity, and they also often finance operations and costs at the producer level, which are thus not integrated in the cost price of the organic cotton fibre.

    Consumers are attracted by organic cotton items thanks to the existing rules and regulations about organic agriculture, which take away mistrust and actually give them confidence in the ‘organic’ claims being made.

    Producers and their organizations have participated in the organic cotton business network Organic Exchange since 2005 through separate farmers’ meetings, where they are often represented by third parties such as buyers, consultants, NGOs or donors.

    Opportunities for cotton ginners and exporters

    The demand for organic cotton fibre is increasing. New opportunities are emerging for cotton exporters, many of which are large companies that have so far considered organic cotton to be too small in scale to be attractive.

    Regular cotton research has thus far not been engaged in organic cotton research. This situation may change with growth in demand for organic cotton, and with pressure from the organic cotton industry.

    Cotton ginners and exporters are in a crucial position to support the expansion of conversion to organic agriculture while many of them employ their own trainers and extensionists.

    Cotton ginners and exporters are the ultimate link in the chain between producers and spinning and textile mills.

    Esquel – Case study on responding to market requirements for organic products.

    Esquel is a vertically integrated garment manufacturer in China. The company owns facilities from cotton farming to garment manufacturing and therefore has the flexibility to try new things at every step. In line with its corporate culture, which promotes, among other things, environmental protection, Esquel began experimenting with growing organic cotton around 2000. Soon after, it began finding out how its customers reacted to this kind of product.

    The reaction was varied. Some customers did not consider organic cotton because they had heard from other sources that the quality was inferior to conventional cotton. On the other extreme, there were customers who wanted the highest quality products, in 100% organic cotton, but were unwilling to pay more for the product.

    In each case Esquel found it had to educate the customer, and often its own staff, before it could determine what would work.While the company is continuously developing new product offerings using organic cotton, it has found several general limitations or guidelines:

    • Organic costs more. In places like China and the United States where cotton is grown on a large scale, high yields can be achieved using conventional chemical farming. Therefore, when switching to organic farming, there is a noticeable drop in yield per acre. This accounts for the higher unit cost of the fibre.Whether the company grows the cotton itself or buys from outside sources, organic cotton adds to the price of the end-product. The challenge for Esquel was tomake sure its customer understood the price difference and would pay a premium for this product.
    • Fibre strength and other characteristics may suffer. As a natural product, cotton crops will vary from season to season and from location to location. However, in general, organic cotton shows lower strength and other characteristics compared with its conventional counterpart. While the crop quality may have been due to Esquel’s inexperience in organic farming, the fact remained that Esquel needed to be aware of those reduced physical characteristics. This affected the kinds of products the company could develop.
    • Only short to medium staple is widely available. The vast majority of organic cotton is of the Upland variety. However, Esquel focuses on high yarn count shirts, which require the use of ELS cotton. With a lack of organic ELS in the market, Esquel needed to find new ways of blending organic cotton with conventional cotton or limit its offerings to lower counts of yarn.

    In light of these findings, Esquel decided to limit its offerings to blended products (5% organic fibre), where the amount of organic fibre does not greatly affect the price or the physical characteristics of the yarn. For customers who wanted 100% organic cotton products, Esquel made sure the customer was willing to pay a premium for the product and offered only lower yarn counts.

    This product mix allowed the company to expand its range of products without radically having to change its manufacturing processes or supply chains. But these offerings were sometimes not exactly what the customer wanted.

    In most cases Esquel was able to explain to the customer the reason for those limitations. Then it worked with the customer to find a good compromise. In some cases, customers had to lower or change their standard to accommodate the use of organic cotton. This was partly because of the nature of organic cotton. However, most customers realized that if they wanted to commit to organic, they needed to be more flexible than with conventional cotton products. This is because they believe that, as buyers, they need to do their part to change the current agricultural practices.

    At the same time Esquel continues to research and improve its spinning, weaving, knitting and finishing techniques to improve performance and value. The ultimate goal is to deliver products made with reasonably priced, high quality organic long staple and extra long staple cotton. However, this will take time and effort to develop. The biggest hurdle is actually achieving satisfactory yields and quality through organic farming.

    At the end of the day, Esquel feels that customers are fully behind the organic cotton movement and are willing to support the development and expansion of the farming of organic cotton. However, farmers and other vendors in the value chain must do their part to educate customers on the advantages and limitations of their products. When there is open dialogue, Esquel has found that customers are quite willing to make compromises, and this will help to ensure a smooth increase in the supply of organic cotton. At the same time, customers will be expecting some improvements in the quality of organic cotton, and producers should work to deliver this.

    *The Global Organic Textile Standards (GOTS) seem to provide a good vehicle for this. However, the GOTS have been criticized by some large players such as M&S for being insufficiently adapted to their consumer demand, scale and practices.