Managing cotton is an INTERDEPENDENT job. It is not only the farmers who mange the cotton, rather it is the whole value chain of cotton from farmers, ginners, merchants, agents, spinning mills, knitting and woven mills, dyeing and finishing mills, readymade garments, brands and retailers, to end customers.
Again there are many supporting and interlinked functions and entities that exists like; scientists, researchers, government bodies, NGOs, agriculturists, trainers, different sustainable initiatives, civil society, seed companies, fertilizer companies, chemical companies, transport, warehousing and logistic companies, insurance, financial institutions, risk management consultants, experts, media, etc.
Our discussion would be confined to cotton spinning mills only. While managing cotton in a spinning mill can encounter two types of risks;
- A) Controllable/Unsystematic Risk and
- B) Uncontrollable/Systematic/Market Risk.
When we talk about managing risk on cotton, we basically talk about the risk that can be minimized, called Controllable risk. A spinning mill can manage cotton well if the following major jobs are addressed methodologically:
- Choice of Cotton
- Cotton flow chart, followed by a comprehensive and dynamic cotton management plan
- Addressing unexpected situations and
- Price Fixation and Risk Management
Choice of cotton
Starting point is to make a choice for cotton, it saves a lot of cost and minimizes lots of unnecessary wastes or MUDA, called in Lean Management. Choice of inferior specifications would lead to inferior quality and product while choice of higher specification would result in excessive material cost reducing profit and sustainability. This is the gateway or starting point and is very important to ensure sustainability of spinning business.
There is no quick-fix to it as each mill is unique and can be largely different in many ways; like:
- Why in cotton spinning business?
- Target market, product, price and place
- Count and count range
- Condition of machine
- Condition and availability of support and service machinery
- Power situation & Humidification System
- People behind the machine people plan and management
- Delegation of authority and responsibility
- Financial leverage and strength
- Marketing plan
Comprehensive cotton management plan
Cotton consist of 50%-90% cost of ‘Cost of Goods Sold (COGS)’, depending on the product and market. So, it is no secret that it is one of the key elements to success and failure for a cotton spinning mill. Then does it not require special emphasis, to build a comprehensive plan backed by systematic process and professional approach?
In Bangladesh it is mostly done by the entrepreneurs while very few mills like BEXIMCO, SQUARE, VIYELLATEX, PAHARTOLI, etc., have tried to do it through professionals and has been able to deal it better than other mills. The point is, not to must have a professional team but at least to deal it with due diligence and importance.
If we check the records of cotton spinning mills that were less affected by the unprecedented market behavior of 2010, definitely they were equipped better, compared to those mills who suffered. Are we sure that another abnormal market is not waiting for us to affect by 2021?
Having a comprehensive cotton management plan can only safeguard from unsystematic risks, but market risk or systematic risk, still remains. Managing or minimizing unsystematic risk effectively can assure wealth maximization, increasing value of the company.
Addressing unexpected situations
Cotton is a business that is concluded by word of mouth and it is very important to ensure sanctity of contract by addressing the interest of both buyer and sellers. International cotton trade is mostly done based on the rules and regulations of International Cotton Association (ICA). In order to safeguard the interest of buyer and seller, it is very important that the value chain becomes the member of ICA and takes part in the dialogue, discussion and negotiation in setting the right set of bylaws that would ensure trust and ethical business. Bangladeshi spinners are in the right direction and it is a pride that Chairman of Ispahani Group, Salman Ispahani, has become the President of ICA, 1st time ever from Bangladesh. We wish he will be able to contribute in formulating and breezing the gaps that would ensure the rights of spinners that are logical and design proper disincentives for entities who are opportunist violators of sanctity of contract.
Cotton is a natural commodity and in spite of all efforts there can be deviation in shipment, quantity, quality, etc. In case of such deviations appropriate knowledge on the ICA rules is an important guideline in proceeding for such situations. Another part is what is to be done with the non-availability or under-quality cotton which is a contingency plan, as well as a situational plan.
Price fixation and risk management
In the 90’s none of the Bangladeshi mills bought cotton on call and all cotton procurement were on the basis of fixed price. It is only since 2015 spinners started booking cotton less at fixed price basis than buying on call. This is a positive change and it reflects maturity of our spinning industry.
Buying at fixed price or on call is not the solution to have the right price for cotton. Rather managing price consistently at market, in line with the change of the market, is the key element to success. It requires deep interest, spontaneous analysis, information, knowledge, passion and experience. In the developed markets mills consults with expert professionals and our mills can also choose to do it.
Cotton is a commodity and traded and hedged in the International Cotton Exchange (ICE). Cotton derivatives assist risk management. But the fundamental to all of this is to be able to identify the market price that is an average market price and attain it consistently. This may require use of derivatives to minimize risk from time to time. In a market where technical outperform fundamentals it is essential to have some risk minimization package and it varies from individual to individual as the backgrounds and appetite for risk are unique for each mill.
In the background there are fundamental analysis, technical analysis, weather, oil price, US Dollar, price of synthetic fiber, fashion outlook and changes in demand, geo-political changes, spec fund movements and many more. It is a matter of perseverance and passion for identifying and keep on questioning, challenging and keep on learning about it over time. There no constant answer because market and the world is always changing. The challenge has to be addressed systematically and professionally as it comes.