The key cotton producing nations are China, India, United States and Pakistan. They roughly produce 37% of global cotton, with China and India contributing 67% and 25% respectively of the aforementioned 37% global cotton output. However, undoubtedly North America was one of the largest producers, which produced 3,222 Mn Kgs of cotton, it has slowly and steadily given way to countries such as China and India. The primary reason for this is the fall in cotton prices over the past 5 years.
America's transition to a tertiary sector over the last three decades has caused a reduction in the workforce available at competitive prices. Therefore, as a result, the average American farmer transformed to the capital intensive production model and thus, incurred high costs per yield. On the other hand, Brazil, India and China (owing to larger a population and lower per capita income) still employ a large labour force in cotton cultivation, this enabled them to produce cotton at a much lower rate albeit at a lower productivity. Additionally, with a declining population and a declining apparel manufacturing sector, America is just as dependent on exports as it is for domestic consumption. Moreover, in the case of Brazil, India and China, cotton exports may be higher than that of America. But as a proportion of local production, it is much lesser than America’s 40% export ratio. These countries are capable of effectively competing against the prices at which America offers its exports.
Cotton prices - Source: Trading Economics
A Brazilian cotton cultivator and processor on an average produced 311 thousand MT cotton per annum (57% Seeds and 43% lint) between 2012 - 2015, which is roughly 1,700 Kg of cotton lint/total Ha planted. SLC Agricola tends to sell c. 95% of its production. This translates to an average cost of c. US$ 1,250 per ha planted and US$ 750.96 per MT of cotton sold. On the other hand, in America, the average cost is US$ 1,620 per Ha planted, c. 1.29x that of SLC Agricola. A majority, 20% - 30%, of the OPEX for Brazil can be attributed to fertiliser and crop protection expenses, while 50 - 60% can be attributed to processing and labour. At the same time, for American cultivators’ fertilisers and crop protection would contribute to c. 34% of OPEX, with a similar 5% on labour; however capital costs, related fuel costs and maintenance can account for roughly 40% - 43% of total costs. The main contributor to the increase in costs for the American cultivators is the cost structure adopted as a result of mechanisation, as c. 40% of costs are overheads, fixed costs.
The cotton cultivators from other developing nations such as China and India could possibly perform much better as compared with their Brazilian counterparts as a result of much lesser labour costs. The developed countries like America amid falling cotton prices would continue to plant more hectares of profitable food crops like corn, soybean and wheat, rather than compete against nations that can produce cotton at a much cheaper price.
Also Read:- Outsourcing in garment manufacturing.