A perfect storm of supply and demand issues have sent cotton prices soaring the world over. Joe Ayling reports on what caused this spike and how it will affect the garment industry.
This week cotton prices in the US reached a decade high, bursting through the US$1 per pound barrier on the IntercontinentalExchange (ICE) on Tuesday (22 September) for only the second time in history.
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It follows historical peaks in China, India and Pakistan, making cotton a major concern for garment makers, who are already being squeezed by spiraling sourcing costs related to currency, labour, transport and other raw materials.
Cotton futures set for December delivery have soared by as much as 30% since July. “This is quite a significant bump,” John Long, retail strategist at Kurt Salmon Associates, told just-style. “As retailers have gone to Asia to look at producing goods for future seasons they’ve been hit with these increases. There’s very little left to take out of the supply chain though.”
So what’s driving up the price?
The price of US cotton normally fluctuates along with the dollar, and against soybean prices, because the two crops can be grown on many of the same acres in the American South and the Mississippi Delta.
However, the current price surge is also being driven by returning demand for textiles following the recession, prompting mills, primarily in Asia, to stock up on bales. Coupled with this rising demand are supply issues too – creating the perfect storm.
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By GlobalDataThe Washington-based International Cotton Advisory Committee said in June that global cotton stocks will fall 18% during the 2009/10 season, to 10.5m tonnes, representing the lowest level in six years.
It has since reported a rebound in production, driven by the US, but said the tightening of stocks available for mill use has pushed cotton prices higher.
China and India, the world’s top two cotton growing nations, are expected to account for most of the increase in global cotton mill use in 2010/11. However, delayed harvests in China and the resumption of cotton exports in India have inflated prices there and pushed China towards importing from the US.
Meanwhile, the world’s fourth largest cotton growing market, Pakistan, has been brought to its knees by a devastating flood of the Indus river last month, destroying around 30% of its cotton crop.
Impact on the garment trade
Already this year, leading fashion brands including Next and Primark have flagged up rising cotton prices as a threat to margins, and retailers will have to decide how to best adapt.
Mike Flanagan, CEO of consultancy Clothesource, told just-style there is a lot of smoke and mirrors when it comes to the matter though, because cotton is often a small proportion of the total cost of making a garment.
“This garment industry is incredibly competitive,” Flanagan says. “Mature retail markets are not growing much at the moment, so there will be plenty of resistance to price increases. The industry is going to find other ways solve this problem.
The use of polyester and polyester mixtures is one way that garment makers can sidestep increased cotton prices, Flanagan notes.
“As cotton becomes an expensive commodity this is going to encourage the premium end of the cotton market, including C&A,” he adds. This year C&A estimates it will sell 23m organic cotton products – representing 10% of cotton garment sales.
Levi Strauss & Co, a leading maker of cotton-rich denim products such as jeans, also says that cotton prices are just one consideration when it comes to pricing.
“We are periodically asked about the impact of fluctuations in cotton prices on our business and the price of our products,” a spokesperson for Levi’s told just-style. “We have been consistent in saying that cotton price is only one of many inputs that impact the future cost of goods. Given the many variables that go into product costs, it is premature to speculate on the long-term implications of the cotton prices we are seeing today.
“While prices may have gone up recently, we contract for finished products in advance, so any effect of cotton prices on the cost of goods sold in the current quarter reflect cotton prices of roughly 6 -12 months ago depending on the lead time. We will see the impact of recent increases in raw material price trends later this year and are taking appropriate pricing actions where necessary.”
Therefore, while the surge in cotton prices appears a little fluffy right now, it weighs down on margins when spun into the wider sourcing equation.
Nevertheless, retailers are more likely to replace cotton with synthetic fibres in a bid to save costs than hike their prices, meaning it will be some time before cotton becomes the next cashmere.
