Cotton farmers may be over the worst – unless the stink bug returns

America's cotton belt has been under pressure from the global recession for the past 18 months. Mark Leftly reports from North Carolina

Waist deep in newly budding cotton plants, David Burns is on the hunt for stink bugs. These little insects have replaced the all but eradicated boll weevils as the pests that give the American cotton farmer nightmares.

The bug, which gets its name from the stench produced when it's crushed, pierces the boll – the protective capsule surrounding the cotton as it matures – allowing fungus to infiltrate. "That pretty much destroys the cotton," says Burns, in his southern drawl.

Happily for Burns, it appears that a sharp burst of pesticide has put paid to the bugs this year. Burns is showing visitors around his 685-acre farm on the border between North and South Carolina.

It's about two weeks ahead of the October harvest, which means the plants are a colourful mix of the various stages of their growth cycle: yellow and pink flowers; green bolls; and white, fluffy cotton balls. Wild turkeys and deer can sometimes be spotted wandering through the crops.

Despite the idyllic setting, the past 18 months have not been a good time to be a US cotton farmer. Prices have plummeted, as the global recession dampened demand for clothing, which accounts for 85 to 90 per cent of cotton sales. A $3.5bn (£2.2bn) industry in the US alone has been under threat.

Burns, who is the president of ZV Pate Incorporated, one of North Carolina's biggest cotton growers, sighs: "It's been tough for us. Last year, the price was down under 50 cents per pound, it's about 60 now. We can be profitable at 70 cents. "

Notice that the price, though still loss-making for producers, is on the up. Most experts in the cotton belt, the 17 states where the crop is planted, think that the key 70-75 cents break-even range will be reached again by the first half of next year.

Clothing retailers, a $349bn industry worldwide, will thus feel a squeeze on margins at a time when consumers are looking for bargains. The contents of a little green boll growing in the US cotton belt, as well as those drinking in the sun in China or India, might yet harm the bottom line for major UK chains from Marks & Spencer to Primark.

Saving the pennies

The depressed price has been a boon to struggling retailers looking to save pennies where they can. During the pre-credit-crunch boom, speculative investors, such as pension funds, were looking to diversify their portfolios away from shares and property. They pumped cash into commodities, artificially raising prices.

Tim Barry, the vice-president of product development at the New York-based US cotton and coffee trading floor ICE Futures, says the result was "volatility off the chart". Demand was such that there were up to 18,000 cotton futures trades a day at the exchange in 2007. Today, it's closer to 10,000.

Cotton spiked at 95 cents a pound in February 2008. Only twice before has it reached a comparable level: once earlier this decade, the other during the American Civil War.

Demand slumped, particularly from China, the world's biggest consumer, and speculators started liquidating their commodities positions. Although retailers have an extraordinary mark-up on the final garment against the amount a cotton farmer makes – a $22 pair of jeans would cost only about $1.20 in raw cotton – every saved cent has become vital, as retail business models have evolved.

Mark Messura, an executive vice-president at the trade body Cotton Incorporated, says: "In the US market, there has been a strong shift these past 15 years to mass merchant stores like Wal-Mart. That's high-volume, low-price and accounts for more than 50 per cent of the US market, and the Wal-Mart model has been moving across the world."

This makes it extremely difficult for rival retailers to sock consumers with increased prices. To make matters worse for high street chains, polyester, the man-made alternative, broadly follows the price of cotton. While still cheaper, there is not enough of a difference to make it an effective substitute, given that consumers typically prefer the feel of cotton.

Chicken 'n' corn on the menu

US cotton farmers had been particularly reliant on China importing their cotton. Even 10 years ago, this was not the case, with domestic demand at about 12 million bales of cotton, or 15 billion men's T-shirts. Now it's barely a quarter of that figure.

Cotton is symbolic of US manufacturing decline. In Scotland County, where ZV Pate is based, unemployment is 70 per cent. This follows the exit of manufacturers of various products from plate glass to golf club grips, as well as many cotton mills.

With little domestic demand to temper the global downturn, farmers used their land to produce booming crops, such as corn. From a peak production in 2004-05 of nearly 24 million bales of cotton – each bale weighs 480lbs, and so is worth around $300 at current prices – US production has slumped to 13 million for 2008-09.

Cotton Incorporated had counted about 30,000 producers as members, but this has fallen by 50 per cent in the downturn as many farmers either lost their farms or stopped producing fibre for apparel. ZV Pate, a conglomerate, planted corn for the first time in 15 years and tried to drive up sales in a completely different type of business – a franchise of 28 Kentucky Fried Chicken restaurants.

Diversification arrested the collapse, and a cotton deficit is emerging. Long-term, this is exacerbated by population growth, with three billion more people needing clothing from 2000 to 2050.

"This scares the retail industry, when raw material prices goes up," says Messura. "Consumers' expectations have changed. It is difficult to take something like apparel and move it back to a price premium."

Allen Terhaar, the executive director of the export promotion body Cotton Council International, says there "is a good chance that cotton will be in the 70-cents range early next year". He also believes that three years of farmers devoting less of their farmland to cotton might be reversed by a slight increase in the coming year.

Why the UK retailer will hurt

This might seem a little obscure to harm the UK. Indeed, the 2008-09 cotton year, which runs from August to July, saw only 14 bales of cotton imported by the UK from the US. However, the UK is a huge importer of clothing from around the world, roughly $22.3bn of garments brought in by retailers in the last calendar year.

Any price growth in cotton and polyester are likely to be passed on from the manufacturer to the high street chains. As Messura puts it: "The retail industry is chasing low costs. If you're M&S, you're always looking for low costs."

M&S and other UK retailers won't find those low costs in cotton for much longer, and so will have to find other ways of scaling their business to satisfy profit-hungry shareholders.

However, David Burns is not worried about a FTSE-100 company a vast ocean away. Optimistic though he is that cotton will soon be profitable once more, he fears a commodity spike might not be enough to save the US farming industry in the long term.

"All the bright young people have gone to the cities. Big homes have deteriorated. Much of the manufacturing has gone. I don't know what the outcome for us is in these rural southern states."

Cotton vs Synthetics

The US cotton and synthetic fibre industries are fighting a multi-million-dollar marketing war that almost defies belief.

Under Armour, a Baltimore-based sports clothing company that uses a synthetic material and is beloved by leading American football players, has been attacking its rival with the phrase: "Cotton is the enemy."

Cotton stands accused of being a poor material as perspiration means it sticks to the skin. Under Armour products reduce such problems. "That campaign is part of the reason we lost market share," says David Earley, a director at Cotton Incorporated.

Earley's team is fighting back with products moving sweat from inside a garment to outside, making the moisture more likely to evaporate. The latest development, TransDRY, is being tested by potential manufacturers and is likely to hit the market next autumn. TransDRY's proposed riposte is: "True performance. Not marketing hype."

What is Organic Cotton?

Organic cotton – grown without manufactured pesticides and farmed without biotechnology – is more expensive than its common counterpart.

Oddly, more organic cotton is consumed – 0.55 per cent of the entire market – than figures suggest is actually produced. That consumption has increased even though more organic cotton has recently been left in warehouses as cost-conscious retailers have stuck by traditional cheaper thread.

The definition of "organic" is unclear and the fact that organic cotton production, despite being time consuming, has nearly quadrupled in three years means some industry sources are suspicious.

Sources say so little organic cotton is used in most garments that the term is virtually redundant. For example, it is believed that some clothing has been labelled as containing organic cotton when only one part of the garment has the thread: the label itself.