A perfect storm of supply and demand has left apparel manufacturers and retailers facing a cocktail of higher material, transport, labour and energy costs at a time when western economies are still limping towards recovery and cash-strapped shoppers continue to hunt for bargains. And one of the most pressing questions for 2011 and beyond is what will happen to cotton prices and availability?

For an industry that prides itself on setting the agenda for what shoppers will wear months, if not years, in advance - trend forecasters are already focusing on autumn/winter 2012/13 - apparel manufacturers, brands and retailers are less certain about what the future holds in terms of sourcing in the year ahead.

One thing is sure, though, according to industry experts consulted by just-style: and that is pressure on prices is here to stay.

"The global garment industry is facing inflationary pressures after an almost unbroken 15 years of downward pressure on prices for most buyers," explains Mike Flanagan, chief executive of industry consultancy Clothesource. He believes this is mainly because "for 15 years there were always cheaper places to move sourcing to. Those alternatives are now pretty well exhausted."

2010 was a particularly tumultuous year, with firms hoping they would be tackling "green shoots" of recovery following the economic upheaval of the previous two years.

But instead they faced spiralling raw material, energy and labour costs, pressure on capacity from emerging consumer markets such as China, soaring freight costs, and disruptions to production from rioting in countries like Bangladesh.

"Prices are absolutely going to be going up; there is just no doubt about it. It's a question of when," agrees John Long, retail strategist at consumer goods consultancy Kurt Salmon.

"There has already been some inflation in Asia and, because of labour and commodity prices in China going up, we foresee that clothing produced in Asia is inevitably going to go up too.

"Retailers have been working pretty hard over the past year, as they've being doing development, to keep a lid on prices. But ultimately, it's just not possible to hold every price the same in a world where everything that goes into making that item is going up."

Massive hike in raw cotton prices
At the heart of the industry's concerns has been a massive hike in the price of raw cotton. Prices more than doubled on the 18 months from March 2009 to the end of September 2010, from 51 cents/lb to almost 116 cents/lb.

And cotton for delivery in March is already sitting at an all-time high of 162 cents/lb on the IntercontinentalExchange (ICE) in New York - a rise of 16% this year alone.

John Flanagan, who heads Flanagan Trading Corp, a North Carolina-based business that specialises in cotton futures and options and prepared hedge strategies for the industry, believes the next 12 months will continue to be tumultuous and that cotton prices will remain high.

Indeed, he thinks it's not inconceivable for prices to reach a short-term spike of 175 cents/lb between now and the next northern hemisphere harvest in October, "as importing countries try to pry the last few bales of cotton from the hands of cotton producers."

The situation has been exacerbated by figures showing this season's cotton supply is almost sold out as growers struggle to meet strong retail growth in China and India.

Rising global demand for organic cotton also means all 2008-2009 stocks have been purchased, as has most of this current year's crop, according to Liesl Truscott, Textile Exchange farm engagement director and lead author of its latest annual Organic Farm and Fiber report. "Brands interested in nailing down their supply need to act now," she adds.  

Perfect-storm of circumstances
Low levels of worldwide cotton inventories followed a perfect-storm of circumstances that began with growers planting less cotton when prices were low, followed by flooding in Australia and Pakistan that damaged crops, and a ban on shipments of the fibre by India, the world's second largest cotton producer and exporter.

Many textile mills have since switched to polyester as a cheaper alternative. But the extra demand has encouraged polyester fibre producers to raise their prices too. In China the average price of polyester staple fibre grew by over 30% between January and mid-October.

While some observers believe rising prices have been driven by speculators on world markets rather than supply and demand, and that this is a bubble that will eventually burst as cotton production increases, those in the know disagree.

"How do they figure that?" asks David Sasso, vice president of international sales, at specialty yarn maker Buhler Quality Yarns. "The market is facing raw materials pricing based on what inventory is available, and as that inventory continues to drop, prices go up."

"Cotton acreage will definitely be higher this spring," explains John Flanagan, "but that may not ease the pressures on price quickly."

He explains that while 20-25% more cotton is likely to be planted in the US this year, not all of it will be harvested, with around 12-20% of the crop lost to bad weather or insect damage. The net result could be that the US increases production by just 1.2m bales to 19.5m, up from 18.3m bales last year. Certainly not enough to help plug the industry's shortfall.

Likewise, the strong La Nina weather pattern which led to the floods in Australia is also set to supercharge India's monsoon as well, and it won't be until the end of the summer before its impact is known. And China, by far the world's most important cotton grower (accounting for about 30% of global production) and Pakistan are only likely to produce normal crops this year.

"All in all, world cotton production may increase modestly, say 5m to 6m bales, but all of that increase is likely to disappear into state reserves and not be available to mills," John Flanagan explains.

What happens next?
What happens next isn't clear-cut either. Even with new crop cotton prices at record highs, there's no guarantee cotton growers won't be tempted to plant corn and soybean instead, since their prices are rising even faster. And cotton producers are likely to want the incentive of a higher risk premium due to increasingly erratic weather patterns around the world.

That said, "if worldwide cotton production is successful this year, prices should start to moderate in the October, November and December time period," John Flanagan believes, but he adds this moderation will likely only allow cotton prices to fall to the 80 cent/lb to 90 cent/lb level.

"2012 should see cotton prices in the 80 cent/lb to $1 level, too. All of this could change if economic growth in China and India falters, but I would not bet on that."

The outlook then is that retailers should recognise and accept that economic growth in Asia has created a demand shift in cotton pricing that is likely to be long lasting.

The major cotton producing countries are already producing as much cotton as they can, new cotton acreage will be difficult to find, and even if regions like South America doubled their output it would be absorbed by rising world consumption.

"A long-term solution will only come when African cotton production is massively increased and that is not likely in the foreseeable future," John Flanagan says.