Economic Integration

Recent extreme price volatility in the cotton market, both physical and futures, has produced an unprecedented number of contract defaults, according to the International Cotton Association.  

With a record range in prices in the past year of approximately $1.25 per pound - from a low of around 70 cents to a high of around $2.25 per pound - the industry is still seeing parties failing to honor their contractual obligations, the ICA reported in its January 12 Newsreel. 

In 2011, we received 242 requests for technical arbitration - over five times our normal yearly average and more than double the prior record high of 2008, said the Liverpool, England-based organization, and the pace does not seem to be slowing down.

Consequently, contract sanctity, always important, has become the most critical issue facing the industry today.  In view of basic economic uncertainty around the world, traders are no longer afforded a few mistakes along the way. Global lending institutions, facing their own restrictions, have become unwilling to extend their clients the financial leverage offered just five years ago.  Therefore, the financial well-being of a company is even more dependent on the honesty of its trading partners.

The concept of contract sanctity centers on the general idea that once parties duly enter into a contract, they must honor their obligations under that contract.  When markets undergo a period of extreme fluctuation, however, buyers who purchase cotton often try to delay or refuse shipment, if prices in the interim have fallen appreciably.  Moreover, it is not uncommon for sellers to do the same, if prices have risen sharply from the point of sale.

A general idea exists that parties should feel free to breach a contract and pay damages, if it is more economically efficient than performing under the contract, thus the record number of arbitration requests last year. The cause for the defaults are many – a weakening consumer market, cancelled orders, price drops. The impact of these actions can be felt along the entire supply chain and put many supply chain actors at risk. 

“The ICA's major guiding principle is the fulfillment of contracts,” said ICA President Antonio Esteve.  The organization works to ensure and promote equitable cotton trading practices through its bylaws and rules, and provides an impartial and effective dispute resolution service through arbitration, which has been upheld by courts around the world.

If a company fails to honor an arbitration award brought against them, it is placed on the "ICA Default List". Defaulters' names are posted and circulated across the cotton community so that they are marginalized from the normal course of business. ICA members are not allowed to trade with counterparties on the default list and, if members do not fulfil their contractual obligations, they face being expelled from the association.

In a move to improve the economic sustainability of the cotton supply chain, the ICA has expanded its outreach by working with organisations that can reinforce its efforts, such as other global cotton associations, the Better Cotton Initiative, the International Textile Manufacturers Federation, major retailers, banks, insurance companies and rating agencies, the ICA president said.  We have also developed a training course for spinners and agents to promote "responsible contracting", which focuses on the behaviour of the cotton market, the use of risk management tools and the ICA Bylaws & Rules. The cotton supply chain is very long, but by reaching out in this way we know we can help promote a safer trading environment.

"The cotton industry is at a crossroads,” said Mr. Esteve. “Our attitudes towards contract performance will shape the industry for years to come. The cotton industry needs to stand united. If not, it will suffer the consequences. 

“It is easy to succumb to the attraction of short term gains, but history shows that this will create irreparable damage that will affect the long term economic sustainability of the cotton supply chain."

Questions:  Is education and partnering with allied organizations an effective way to guarantee the execution of contracts?

What other efforts might be made to ensure sanctity of contracts?

The second of three scheduled research projects by the University of Arkansas has revealed benefits for apparel suppliers using radio frequency identification (RFID), according to study sponsors the American Apparel & Footwear Association (AAFA) and GS1 US.

A mid-month news release from AAFA reported that the year-long project found the potential for suppliers to realize both top- and bottom-line improvements via increased inventory accuracy, cycle count reductions and minimized chargebacks. 

“The University of Arkansas report ... offers a greater understanding of the many uses of RFID technology for the apparel industry particularly in the area of inventory accuracy,” said AAFA Special Advisor Mary Howell.  “By exploring these use cases, apparel and footwear brands can begin to see the full range of benefits RFID can provide when working to remain competitive in the global market by streamlining the supply chain and continuing to deliver quality, safe, and affordable clothes and shoes to American consumers.”

The research – titled “Supplier Return on Investment Use Case Data Collection and Analysis” – is the second phase in a three-phase study commonly referred to as the “Many-to-Many study.” It focused on three supplier use cases.

AAFA said researchers measured the benefits that apparel suppliers can achieve by adopting RFID based on GS1 Electronic Product Code (EPC) standards.  The effects of EPC-based tracking on improving the suppliers' inventory accuracy were quantified, along with the effects on their productivity, costs, and revenues.

In one use case, increased inventory accuracy, researchers discovered that suppliers’ estimates for their outbound shipments were much higher than the actual shipment count accuracy, in part because the companies were auditing very small percentages of those shipments, said the trade organization. The costs of incorrect shipments, including chargebacks, are very high, it noted. With EPC-based RFID enabling audits on 100 percent of shipments, the frequency of incorrect shipments can drop to zero, creating savings equal to the cost of implementing the RFID system.

“The research captures the first efforts of retail suppliers to shift their focus from just playing ‘catch up’ to retailer source tagging requirements, to truly leveraging the full value of item level tags by discovering the benefit and the value in their own supplier operations,” said Justin Patton, Managing Director, ITRI/RFID Research Center, University of Arkansas.

“The simple concept behind the study is to answer the question, What happens when suppliers move beyond EPC tagging just for their retail partner’s sake, and begin to internally capture and use EPC data from their tagged items?” said Patrick Javick, vice president, industry engagement, GS1 US. “Retailers use standardized RFID technology to improve inventory accuracy, and now with EPC, suppliers can also feel confident of the high level of accuracy in their shipments.”

In addition to the key findings, the research highlights the critical relationship between apparel suppliers and retailers and encourages continued collaboration in the widespread adoption of RFID.  

The American Apparel & Footwear Association (AAFA) is the national trade association representing apparel, footwear and other sewn products companies, and their suppliers, which compete in the global market. 

GS1 US, a member of GS1, is a not-for-profit organization that brings industry communities together to solve supply-chain problems through the adoption and implementation of GS1 standards. More than 200,000 businesses in 25 industries rely on GS1 US for trading-partner collaboration and for maximizing the cost effectiveness, speed, visibility, security and sustainability of their business processes. They achieve these benefits through solutions based on GS1 global unique numbering and identification systems, bar codes, Electronic Product Code-based RFID, data synchronization, and electronic information exchange. GS1 US also manages the United Nations Standard Products and Services Code® (UNSPSC®).

Questions:  What other areas of the supply chain lend themselves greater use of RFID technology?

Considering the incorporation of RFID is less than 10 years old, which sectors across the cotton supply chain, from field to consumer, have been quickest to implement the new technology?

Which sector stands to benefit the greatest from the use of RFID for long-term planning purposes?

China celebrated the 10th anniversary of its accession to the World Trade Organization last month, and according to Liverpool-based Cotlook Ltd., its vast penetration into global textile markets has been remarkable.  Despite the achievement, however, the same considerations that brought textile dominance in the United States and Europe to an end, are now weighing against the Chinese industry, and countries, such as Bangladesh, are waiting in the wings to succeed the Asian giant.

In its 2011 year-end edition of Cotton Outlook, Cotlook noted:

“In 2001, China accounted for less than 7 percent of imports of textiles and apparel into the United States. During the first ten months of 2011, that proportion was over 46 percent. However, the period of strong export growth is thought to be nearing an end, and the acknowledged aim of policy henceforth will be to lessen reliance on exports in favour of a shift toward domestic consumption, as rising labour costs and an appreciating currency take their toll of competitiveness in export markets.

“From an international perspective, the prospect of a fundamental shift in China’s role raises issues of great significance to garment retailers who habitually source their products from that market. A report by consultants McKinsey and Company confirms that significant numbers of buyers already foresee a reduction of orders placed in China. The same report highlights the potential for Bangladesh to emerge as the major beneficiary of China’s relative decline.

“Provided challenges can be met, for example in the areas of transport and energy infrastructure, as well as compliance with labour and environmental standards, McKinsey anticipates that Bangladesh’s garment exports can grow threefold over the next decade. Reference is made to the price competitiveness of the country’s garment sector, which has contributed to its ‘strong starting position’ for future expansion.

“An intriguing question, assuming that such optimism is justified, concerns the future of the country’s spinning industry. Currently beleaguered by high-priced raw cotton import contracts, intense competition from cotton yarn imports, and the resultant, acute financial pressures, spinners may nonetheless be encouraged by the buoyant outlook for the downstream industry they serve.”

Questions:  Is there general acceptance that China’s dominance of the world textile market is nearing a peak?

If it is to maintain its position as the leading global exporter, what broad policy changes must occur?