Last week the Indian Government increased price guarantees for cotton farmers by up to 48% over last season, creating a back-stop price of 3,000 INR per bale of long staple and 2,500 INR of medium Staple via the federally controlled Cotton Corp. of India. Cotton prices have already been under pressure as total hectares planted for this season declined 2% from last year as farmers shifted to food staples such as rice to capture skyrocketing prices. Critics are charging that this increase will raise domestic prices for cotton above the current global average.
A question of Yield: Manmohan Singh’s populist socialist government is obliged to provide this level of price protection to the nation’s 4.5 Million cotton farmers to maintain political support among the rural poor. For India’s farmers, every rupee counts: although improved technology (most notably the introduction of Monsanto Bt seeds) and irrigation have helped increase crop yields from 300kg per hectare five years ago to 560kg last year, Indian yields still lag every other major global producer significantly. Put plainly, Indian farmers realize smaller returns for their labor than their competitors abroad. In a socialist nation were 60% of the population is employed in agriculture that creates pressure for the government to intervene, particularly an administration that has barely survived a recent parliamentary vote.
Exports: India is the second largest producer of Cotton on earth but, thanks to its huge textile industry they remain a less significant player in the global export market than smaller producers such as the US and Brazil. Not surprisingly the biggest buyer for Indian Cotton exports is China, and rising prices and lower yields have already been felt by buyers there.
Textiles: The price increase raised howls of protest from textile industry groups. P.D. Patodia, chairman of the Confederation of Indian Textile Industry, was quoted in the Indian media on Thursday saying “It has come as a rude shock to the industry in the throes of a crisis; domestic prices are already 15% higher than international prices. This would trigger another price spiral which the industry will not be able to afford."
The textile industry argument is, basically, that the slowing trajectory of textile sales growth for Indian mills has been more than offset by increasing Chinese demand for raw cotton and that increasing the domestic price of fiber now will put Indian textile and apparel manufacturers at a grave disadvantage with competitors for their two key markets, the US –which has already provided preferential status to Central American producers, and Europe.
Our analysis looks at every apparel and footwear retailer in the US – public and private – with more than 5 stores. We look at the exact lat/long for every single store, and gauge tourist exposure. We defined “tourist cities” based on the top 10 most visited cities by international tourist as defined by the Office of Travel and Tourism Industries.
Why include private companies? Because last I checked, many brands that are public sell goods in private retailers. Goody’s was private. So was Boscov’s. Get the picture?
Some notable call outs…
1. The top 7 companies are private – ouch!
2. Quiksilver and Tiffany at 44%.
3. Burberry (39%) and Hugo Boss (45%)
4. Adidas at 27% has 3x Nike’s direct exposure.
5. Ralph Lauren very notable at 37%.
6. Modell’s (important Nike, Adi, UA customer) at 30%.
7. Levi’s 28% (a desperate Levi’s puts pressure on VFC).
8. DSW – a company I think is terminal – is over 20%.
9. Coach surprisingly low at 18%.
10. Guess at only 24%, despite management’s comment that 80% of North American retail stores are in travel markets. This brings up the next factor for us to slice and dice. The difference in sales productivity for these stores versus non-travel market stores. We need to strip out outlets and look at the top producing stores only. Coach, for example, has only 18% of stores in tourist markets. But 12% of its sales come from its NYC Flagship store. The bottom line is that the percentages you see in the table below might understate the real revenue exposure.
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The US Personal Savings Rate went to 12% in the 1970's. Going from zero to half way there will be the first move, but all of the facts concerning access/cost of capital tell me we could quite conceivably see double digits again.
2008 has been difficult for South African industry as the hopelessly overstretched power grid has subjected factories and mines to blackouts repeatedly, causing foreign investors to cool on new projects. For a nation with an unemployment rate in excess of 20%, this is very, very bad news.
As the South African Rand depreciates versus the US Dollar, and domestic cost of living climbs for the residents of Sub Saharan Africa’s largest economy, so too does the risk of more ugly civil unrest like the riots this spring.
Its global this time, indeed.
Andrew Barber has charted US chicken production as a percentage of the total estimated US population since the US Depression as well as the per capita estimates that Dave and his team prepared (see charts below).
Tops are processes, not points. This top in per cap chicken consumption is a pending tsunami for TSN and PPC, who we continue to be negative on. While I covered our TSN short position on a big down move on Thursday, look for me to re-short it on strength. For PPC, which I re-shorted on strength on Friday, I'm looking for $10.01 next (26% lower from Friday’s close). There are some big concentrated holders on the PPC shareholder list that may not see the fundamentals here that we do. That’s what makes a market, so we’re looking forward to the debate. Concentration on a holders list like this is a massive liability when company fundamentals begin to structurally unwind. If you own Pilgrim’s Pride (PPC) today, you must think it’s cheap and washed out. We think you think it’s cheap because you are using the wrong numbers.
See charts, courtesy of Stockcharts.com, below. Our restaurant/food/beverage Partner, Howard Penney, remains negative on the chicken processors. See his Research Edge Portal for more.
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