Some observers of the fall in US consumer spending have noted that despite the overall contraction, some merchants, such as Wal-Mart, are reporting solid sales gains. They infer that buyers are still spending, but have downtraded radically so as to reduce their total expenditures.
While one needs to take care in generalizing from the US experience, one might assume recessionary spending patterns elsewhere: a reduction in discretionary purchases, greater focus on the basics, a cutback on durables as they are traded in less frequently.
What seems surprising is that cotton, which is used primarily for staples rather than luxury items, has seen a sharp fall in demand. From Bloomberg:
Cotton users are halting orders from the U.S., the world’s biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China and sends prices to a six-year low.
Delays, cancellations and order reductions of U.S. upland cotton by foreign buyers rose almost sevenfold from a year earlier to 329,600 running bales (74,752 metric tons) in the first 13 weeks of the marketing year that started in Augus….The level is the highest since at least 1998. A bale weighs 500 pounds.
Cotton prices fell 54 percent from a 12-year high in March, and Barclays Capital says demand is so weak no rally is likely to last…..
“We are seeing quite a few delays,” said Andy Weil, president of Weil Brothers Cotton Inc. in Montgomery, Alabama, and past president of the American Cotton Shippers Association. “Demand is in a terrible state of affairs. When Chinese exports depend on American and Europeans economies, which are now in a recession, they have no demand for raw materials.”
China, the world’s biggest cotton importer, canceled or delayed 34,100 bales of U.S. orders in the week ended Oct. 23, or 4,100 bales more than its new orders, according to the USDA. Total reductions reached 41,300 bales that week, including buyers in Bangladesh and Indonesia. A week later, cancellations and delays were 11,500 bales from buyers in China, Turkey and Indonesia, government reports show….
Global cotton use will drop 3.3 percent to 119.3 million bales in the current marketing year, the USDA estimates. China will consume 51 million bales, down from an initial estimate of 55 million and the first annual decline in a decade, as consumer spending falls, the USDA said…
Jiangsu Yulun Textile Group Co., a yarn spinner in Jiangsu province, buys cotton to last less than a month, compared with three months of inventories in the past.
“We are having difficulty with financing,” Zhang Jianhong, manager of materials at Jiangsu, said by telephone from Qingjiang. “The risk of importing cotton is very high. The downstream businesses, the clothing manufacturers, owe us money. All we have are bunch of IOUs. It’s a very difficult time.”
Cotton consumption will be lower than previously expected in Pakistan and Turkey, the largest importers after China, according USDA forecasts.
“For my company, the demand is fairly non-existent,” said Angie Goodman, president of Lubbock, Texas-based ACG Cotton Marketing LLC, which ships cotton mainly to Turkey. “They are buying in a hand-to-mouth method.”
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Chain reaction in the real economy. Receivables pile up, manufacturers can’t pay commodities suppliers, struggle to make payrolls, forget expansion.
Retailers that were on 30-60-90 day same as cash accounts with wholesalers are suddenly cut off because no one in the supply chain has access to cheap or reasonably priced credit.
Anyone that has run a small to medium size business through a recession knows what this is like. Those managers that are forced to lay off good workers in hard times are stressed.
Meanwhile the Gov is busily concentrating on Wall St bailouts, doing nothing to help the real economy. Perhaps when the azz hats go to the store to buy some new cotton underware they will find none for sale?
I’m sure the blabfest over the weekend in Washington fixed these problems.
There is clear evidence that retailers are withholding payment to suppliers for longer whilst reducing inventories. This is working its way back up the supply chain as each party reduces inventory. At the root of the chain like the cotton producer there is just no demand, as everyone works to reduce inventories rather than order new stock from suppliers. Compounding the problem is the problem with letters of credit, but more so the withdrawal of supplier credit insurance. Insurance companies are ratcheting up costs and cutting back their exposure to risks meaning suppliers are being exposed to more and more risk further down the chain.
The end result will most likely be some cotton producers will go out of business, which when the supply chain has consumed all its spare inventories may mean a production shortage. The risk is that if the inventory reduction is prolonged then you could get a significant rebound in commodity prices as producers have gone out of business and there are not enough producers to meet demand. A commodity price rebound has to be what China and the US fear most as this would cut Chinas surpluses and hence their need to buy US treasuries. Inflation risks might bloom as a result and it would be up to the FED to time the transition of policy for inflationary pricing in a deflationary environment exactly right. Tightrope walking comes to mind.
G-20 statement: ‘Accounting standards should be harmonized around the world, the group said, and regulators should consider whether current rules properly value securities, particularly complex, illiquic products, during times of stress.’
Mish’s comment: ‘This sounds suspiciously like a move away from mark to market accounting to more mark to fantasy accounting.’
G-20 statement: ‘The leaders directed their finance misisters to work on recommendations for enchancing disclosure by investors and institutions, including hedge funds, of their financial conditions.’
Mish’s comment: ‘Meanwhile Paulson and Bernanke are in a battle with Bloomberg because they are failing to disclose to investors exactly what they are doing with taxpayer money.’
‘Top 5 Things G-20 Ignored
05: US Dollar Hegemony.
04: Micro-Mismanagement of interest rates by the Fed and Central Bankers.
03: Spending run rampant in US authorized by Congress. Same thing in other G-20 countries.
02: Of immediate concern is the Collapse of Trade, Letters of Credit, and Baltic Dry Shipping. Please see Yet More Trade Finance Worries (Not for the Fainthearted).
01: Fractional Reserve Lending run rampant, leverage, excessive credit creation, and unsound fiat currencies. In other words the G-20 ignored discussing the very cause of the problem we are now facing.’
http://globaleconomicanalysis.blogspot.com/
Mish’s comment: ‘Meanwhile Paulson and Bernanke are in a battle with Bloomberg because they are failing to disclose to investors exactly what they are doing with taxpayer money.’
I’m no expert, but regarding Bernanke I don’t see that the money being created by the Fed to expand its balance sheet (?) is “taxpayer money”.
As for Paulson and the money borrowed (into existence?) by the Treasury, yes — this debt represents obligations of US taxpayers.
I don’t find this suprising-
Most people I know seem to have 20-30 outfits. We have an odd cultural pattern where you can’t wear the same outfit all the time.
Maintaining a wardrobe that size (one you change based on “fashion” not “wear and tear”) is surely discretionary spending.
I remember living in London a few years ago and being surprised that most people had 2-3 outfits, and just rotated through those.
The fall in the price of cotton is ONLY surprising if you do not understand the SCOPE of the deflationary risks we face.
Nothing is immune. That includes staples.
We face a risk, not a certainty, of HYPERdeflation. This is a sign of that.
Avoid the American press. Turn off the television.
Get up to speed.
Matt Dubuque
I agree with anon 6:24; rather than scaling down operations across the supply chain, it appears that the textiles industry is putting a massive reduction in purchase of raw materials while it works through its inventory. It’s not an illogical move, but as pointed out, it could mean fewer suppliers available when the industry eventually needs to start purchasing raw materials again. Lower inventories are less of a financial burden, but they could also leave the industry very exposed should materials costs and/or shipping costs suddenly reverse and head higher (between the two, I suspect transportation costs will stay low, but cotton may rebound.)
Retail news FYI: Profit in its credit-card business fell to $35 million from $202 million last year because of Target's lower investment in the portfolio, a decline in its overall performance because of higher bad-debt expenses and lower interest rates.
The company sold 47 percent of its credit card receivables to JPMorgan Chase in May.
Target said it will stop most share repurchases for now and cut its 2009 expected capital expenditures by $1 billion, mainly due to a lower estimate of 2009 investments in stores that would have opened in 2010 and beyond.
"The current environment and our financial outlook have naturally reduced our appetite for investment in our business," Chief Financial Officer Doug Scovanner said in a statement.
Meanwhile, Target said it was still evaluating the proposal last month by investor William Ackman…
>> Something tells me that JPMorgan Chase has a deal with Treasury, and thus Treasury is essentially helping JP extend credit to Target and meanwhile Target will reward its insiders and so on and so forth… does this mean Target is supported by taxpayers and will wal-mart be next, huh, huh?
The end result will most likely be some cotton producers will go out of business, which when the supply chain has consumed all its spare inventories may mean a production shortage
I expect this in many commodities. The harder to store, the worse it should get. Oil is at a $10 contango for the year, which is an astounding 18% riskless return, provided you have the credit and storage capacity.