Cotton prices hit a 15-year high of 91.80 cents a pound recently on the IntercontinentalExchange [ICE] – one of two trading exchanges for cotton - after averaging 78 cents a pound last year. The International Cotton Advisory Committee [ICAC], meanwhile, says the commodity is expected to average 89 cents this year, and suggests that the higher prices are here to stay.
“There are many factors that suggest that cotton prices are likely to remain high in 2010-11: tight stocks, strong demand and potential export restrictions in major exporting countries among them,” says ICAC economist Alejandro Plastina.
For businesses and consumers, higher prices might mean switching to alternative commodities, such as polyester.
According to Plastina, if competing fiber prices remain stable, “textile companies might substitute away from cotton to other fibers. This would put downward pressure on the demand,” suggesting that cotton’s price tag wouldn’t be as alarming.
But cotton also competes with commodities that aren’t used to make clothes, like corn.
Since cotton consumption has dropped 11% in the wake of the recession, many growers opted to grow more profitable crops such as corn (ethanol) and soybeans instead.
It made sense at the time: cotton inventories were at high levels, and consumption was low, so growers could dedicate farm space to non-cotton crops. Two years later, that dynamic has reversed.
James Pruden, director of public relations at Cotton Inc., says cotton supplies have dropped considerably, and now stand at just 3.2 million bales. At the same time, the International Cotton Advisory Committee says world cotton consumption will rise 2% this year to 25.1 million metric tons.
(For comparison, consumption was 24.6 million tons for the 2009-10 harvest year, 23.5 million for the 2008-09 harvest and 26.5 million for the 2007-08 harvest.)
While the simple laws of supply and demand have dictated cotton’s price spike, they haven’t changed consumers’ behaviors, so far.
“Despite the current price challenges, cotton remains consumers’ preferred fiber, enjoying a three-quarters share of apparel products offered at retail,” according to Cotton Inc.
Cotton's Christmas Crunch
Many analysts say the higher prices will trickle down to the consumer as early as the holiday season, and certainly by spring of next year.
A majority of designer looks heading down New York City’s Lincoln Center runways this week for Mercedes-Benz Spring 2011 Fashion Week are spun from cotton. While the higher prices may not have been an issue as many designers were making their clothes, they will definitely be an issue when they manufacture their lines.
VF Corp. (VFC: 75.07 ,0.00 ,0.00%) warns that higher cotton costs will have an impact next year, but the Lee denim maker won’t specify to what degree. “We would be able to offset most of this impact through other means (i.e. better efficiencies in our owned plants and perhaps some modest price increases if appropriate).”
Jeans make up a third of VF’s total revenues.
Cotton is an important component of denim, and retailers and fashion houses may soon find themselves changing their style.
