Dwindling Egyptian cotton output to blame for Welspun’s woes?

The scandal involving the alleged sale of falsely labelled Egyptian cotton products by textile manufacturer Welspun India to US big box retailers highlights a stiff reality facing the high-end fibre market: there isn't much Egyptian cotton any more (See: Bed Bath joins Target, other US buyers in Welspun probe).

The shortage of cotton from Egypt, which commands a premium due to its superior quality, creates an incentive to blend it with other types of cotton without disclosing it or to counterfeit the label altogether, cotton traders said, exacerbating a problem that has plagued the industry for years, reports Reuters.

Welspun India has lost 42 per cent of its market value in the three days since Target Corp said it would sever ties with the textile manufacturer, one of the world's largest, accusing it of substituting cheaper, non-Egyptian cotton into sheets and pillowcases.

Egyptian cotton is prized because much of it is "long staple" or "extra long staple," meaning the length of the cotton fibres is longer, resulting in a finer, lighter more durable fabric and longer-lasting, higher-end clothing.

While other countries including the United States and Australia produce larger quantities of high-end cotton than Egypt, cotton from the North African country has retained its prestige because of a long history growing the crop.

But Egypt's cotton output has been declining for the past decade after farmers failed to adapt to shifting consumer demand for mass-produced items made from short- or medium-staple fiber, according to the US Department of Agriculture (USDA).

The decline has become a full-fledged crisis in recent years after the government removed cash subsidies, and many farmers replaced cotton acreage with rice, the USDA said.

Egypt will produce just 160,000 480-lb bales of cotton in 2016-17, down from 1.4 million bales as recently as 2004-05, accounting for less than 0.2 per cent of expected global output.

This means some products marketed as containing Egyptian cotton almost certainly do not, or are blended with other types of cotton without proper disclosure, Jordan Lea, chairman and co-owner of cotton merchant Eastern Trading in Greenville, South Carolina, told Reuters.

"If you look at the volume of Egyptian goods that are for sale, and you look at the volume of Egyptian cotton that's produced, it would lead one to scratch one's head," Lea said.

Long and extra long staple cotton is rare - it makes up just 2.5 per cent of annual world cotton production of more than 100 million bales, according to the USDA - and trades at a substantial premium.

US extra long staple cotton, or "pima," trades for 152.25 cents per lb, according to Thomson Reuters Eikon data, a 125 per cent premium over cotton prices on ICE Futures US, a contract that accepts cotton of a "strict low middling staple length".

Ron Lawson, a cotton industry veteran and broker with LOGIC Advisors in Sonoma, California, said he had "no idea" what Egyptian cotton prices were, which he said showed how much of a "novelty" item the fibre was.

Improper labelling of cotton products including clothing and bedding is a violation of the U.S. Textile Act and Rules, which are enforced by the Federal Trade Commission (FTC).

An FTC spokesman declined to comment to Reuters on whether the agency was aware of Target's allegations or had started an investigation.

Only one of three
Egypt's cotton association appears to be aware of widespread counterfeiting. In April, its executive director told trade publication Home and Textiles Today that it had tested retail products labeled 'Egyptian cotton' and found that 90 per cent contained no Egyptian cotton at all.

The Cotton Egypt Association lists Welspun as one of just three companies permitted to label its products with the association's "Gold Seal," which was launched earlier this year and is meant to ensure authenticity.

Mukesh Saviani, a Welspun executive, told the trade publication in February that the seal was "an assurance to retailers that they will not get into any compliance issues."

The scandal could leave big US retailers wary of dealing with products labelled Egyptian cotton, potentially providing a boon to growers of US Pima cotton in places like California and Arizona.

"The Supima boys are doing backflips and pirouettes on their desks right now," Lawson said, referring to an association that provides a trademark indicating cotton products come from 100 per cent American Pima cotton.