Olam Insights

By Ashok Hegde, Global Head & CEO, Olam Cotton

Our journey to the No. 2 position amongst cotton merchants globally has involved both inorganic and organic growth, in tandem with geographic diversification of sourcing. Nine years ago, Cotton was the first platform under which Olam made a major acquisition with the purchase and integration of Queensland Cotton. Today Olam Cotton is a global leader in cotton with volumes exceeding 1 million metric tonnes (MT) annually.

Return to steady growth

The cotton sector has faced challenging times in the recent past. Our ability to plan for and deal effectively with supply shocks, price volatility and ever changing demand patterns has been a key competitive advantage during these times.

The cotton price volatility of 2011 led to a shift in demand from natural fibres to synthetic fibres. However, by 2014, demand and pricing for cotton began to stabilise. There was a return to steady growth for natural fibres despite continued faster growth in demand for synthetics, indicating a reduced rate of substitution and increasing outright demand for both types of fibre.

In the past two years, the overhang of stock in China has been reduced, marking the beginning of the end of a period of world surplus and a likely return to more positive demand for cotton. Within this shift, we have seen the influence of governments reduce in the sector and a less encumbered direct market emerging with, for example, cotton in China being sold directly by farmers to ginners.

Cotton supply and demand have now almost reached a balanced position, with current supply at almost 115 million bales and demand of around 117 million bales². At a macro level, global GDP growth of 2% to 3% should be positive for the sector and we expect to see cotton demand continuing to grow in the range of 1.5% to 2% in the coming years.

Playing to our strengths

Throughout our cotton journey, Olam’s purpose of Growing Responsibly has remained at the core of our strategy.

Through Société d’Exploitation Cotonnière Olam (SECO), our operations in Côte d’Ivoire, we have developed a strong and scalable operating template that focuses on small growers’ cotton production and integrated ginning (IG).

IG involves the integration of ginning with an outgrower programme and farm extension activities such as provision of agri-inputs and agronomic support to farmers with the objective of increasing yields. It provides for visibility and control over the entire supply chain, from production at farm to processing at gin and delivery of differentiated cotton to textile mill. In addition, community development projects, including supporting maize production for food security, are an integral part of IG. This business model is commercially viable and scalable for long term sustainable growth. In the coming years we will replicate this model in other select African countries.

While we work towards creating greater value from our business in Africa and improving livelihoods for smallholders there through IG, we will also continue to strengthen Olam Cotton’s domestic market positions in the three largest cotton producing countries – US, China and India. This will be achieved through larger volumes in merchandising and handling, which also drive accumulation of on the ground market intelligence to support our overall trading capabilities.

In Australia, we work with joint venture partners who are land owners such as Rural Funds Management to lease and operate cotton farms. In doing so, we achieve the economics of cotton farming without having to own the assets – which also directly supports our ginning capacity there.

Through these strategies, we will continue to diversify Olam Cotton’s earnings profile. Through IG along with the current trading business, Africa is expected to contribute 25% of Olam Cotton’s profits while the Americas will contribute about 35%, Asia 25% and Australia 15% in the next three years.