Turmoil in cotton production is creating pricing headaches for mills, vendors and retailers, with consumers likely to pay part of the bill for the steep rise in costs.
This story first appeared in the May 24, 2010 issue of WWD. Subscribe Today.
Executives predicted retail markups in the low-single digits for holiday goods, including robes, sleepwear and other items, and said the more difficult challenge will be for spring 2011, when increases could be as much as 10 percent.
The jump in prices comes as the industry navigates a recovery fraught with obstacles — from a volatile stock market to global economic uncertainty, fragile consumer confidence and persistent high unemployment.
“It is unrealistic to believe the increases can be fully deflected.…The reality is we are all facing the same issue, and coming on the heels of a global recession, no one is in a position to absorb the increases,” said Peter Gabbe, chief operating officer of The Carole Hochman Design Group. “Some prices will have to rise, and everyone will have to collaborate in the solutions.”
The surge in cotton prices has been caused by several factors:
• Poor weather conditions in China — the world’s top producer of cotton — damaged crops.
• An indefinite ban on raw cotton exports from India, the No. 2 cotton producer.
• Factories that closed because of the recession.
• World consumption in 2010-11 is forecast to exceed production for the fifth straight year, the first time this has happened in 50 years.
• Shrinking cotton inventories will drive the stocks-to-use ratio to the lowest level in 16 years, according to the U.S. Department of Agriculture.
• Cotton mills in Pakistan might shut. The country is the world’s fourth-biggest cotton producer but relies on Indian imports for domestic demand.
“The increase in cotton goods will begin to trickle down to consumers in a very small way for holiday selling,” said Jonathan Greller, senior vice president and general merchandise manager of men’s, children’s and intimate apparel at Lord & Taylor. “It is much more evident in spring 2011, where we are seeing 5 to 10 percent increases in retail prices for like programs. We are partnering closer than ever with our vendors to ensure we are delivering a price-value relationship.”
Cotton, which accounts for about 35 percent of world fiber use, is the main fiber used by companies such as Hanesbrands Inc., Fruit of the Loom Inc. and Jockey International that specialize in underwear, T-shirts and casualwear.
About 80 countries produce cotton, but the U.S., China, and India together provide two-thirds of the world’s volume. The U.S., which ranks third in production, is the leading exporter, accounting for more than one-third of global trade in raw cotton. The U.S. cotton industry generates more than $25 billion in products annually, according to the Economic Research Service of the USDA.
The key issue is one “of supply and demand,” said Kim Glas, deputy assistant commerce secretary for textiles and apparel. “We are consuming more cotton than we are producing worldwide. In addition, when we had the economic downturn, a lot of cotton growers cut down on cotton to grow soybeans and corn, and they will now be shifting back to cotton. China had a problem with their cotton crops, especially Western China, which had a snowstorm. But India thinks it will have a good crop next year. The ban [in India] certainly does contribute to the rise in the cost of cotton.”
Regarding consumer spending, Glas said, “The brands and retailers I spoke with…basically say the economy is on the upswing, and people feel there will be more spending next year. Brands and retailers are aware of what’s going on with the consumer and they are trying to give them more bang for the buck.”
The global nosedive in stocks last week, which was triggered primarily by rising fears that the debt crisis in Europe could spread and picked up momentum because of new financial regulations in the U.S. and in Europe, appeared to stabilize on Friday.
The USDA has estimated that world cotton output would reach 113.9 million bales, compared with 102.9 million bales in the current marketing year. But global consumption may increase to 119.1 million bales next season, from about 115.9 million.
“All of these factors have come together for a perfect storm,” said Kim Kitchings, senior director of corporate strategy and program metrics at Cotton Inc. “This economic improvement has been a surprise, and it caught people off guard.”
As a result, retailers and wholesalers are focusing on the need for effective risk management planning in an effort to deflect rising costs. The situation is particularly difficult for firms that sell cotton goods that are sourced in India, Pakistan and elsewhere in Asia. Foreign factories, as well as the entire supply chain from spinners and dyers to sewers and finishers, are said to be pressing for shorter lead times and hefty price commitments since the price of cotton futures jumped 93 percent over the past year to 74.35 cents a pound, according to WWD’s Fiber Price List.
There also is confusion in the marketplace over the correct price of cotton per pound amid reports from vendors that some foreign suppliers are hoarding cotton stocks with the intention of selling to the highest bidder. Over the past year, the Cotlook A-Index, a proxy for global cotton prices that generally trends in step with but is different from prices on the U.S. futures market, quoted a 55 percent price increase for cotton per pound. The price of cotton closed at 91.15 cents Friday.
“I’ve heard grumbling all along the supply chain,” said Gary Raines, vice president of economics and analysis at FCStone Group Inc., a risk-management consultant in Nashville. “I’m receiving many calls from mills, manufacturers and retailers just squealing over what this is all about. The price of cotton fluctuates substantially. If cotton prices are so volatile, somewhere along the pipeline someone has to eat those increases.”
The hoarding of cotton is “happening to a degree, especially in India,” Raines said. “A couple of weeks ago, there were confirmed cases of that going on since August and September.”
A majority of stores source their own private label programs of cotton goods and are facing the same problems as wholesalers.
Target does not anticipate that cotton prices will result in price increases for the holiday season, but a spokeswoman said that pricing for spring had not been determined.
“Target has an ongoing commitment to negotiating the best prices on all raw materials, including cotton.…Due to the ongoing changes in the market, we continuously work with our suppliers to monitor the impact of rising cotton prices and any potential effects on our short- and long-term sourcing strategies,” the spokeswoman said.
Manufacturers said they expect they will have to absorb the price increases, and in some cases, a few will raise price points.
Matt Hall, vice president of external communications at Hanesbrands, said the company has supply agreements in place and doesn’t need to rely on spot yarn orders.
“We know what our cotton costs are for the length of the year,” he said. “For the first quarter, we had a $13 million benefit of cotton at 52 cents a pound. For the second, third and fourth quarters, there will be a $47 million impact. So for the full year, there will be $34 million in cotton costs, averaging 69 cents.…We’ve been very up front with retailers about what’s going on in the cotton chain. Last time we took pricing was two years ago, with an average price increase of 4 percent in all retail channels. But we don’t take pricing lightly, and for us it takes three to four months to execute a price increase.”
Bob Nolan, president of Jockey International North America’s wholesale and licensing operations, acknowledged the increased pressure. “There are price increases, and we are absorbing it but not passing it along, because the economy is too fragile,” he said. “From our standpoint, we push some of the costs to the fabric people and we absorb some, too.”
Some companies are trying to avoid price increases through long-term strategic planning.
“We have [sourcing-factory] relationships that are five to 10 years old,” said Richard Leeds, president and chairman of Richard Leeds International. “We sat down with them eight months ago and took a position on buying cotton forward in order to protect our retailers and consumers. This is the second year in a row we have done this, and it keeps us competitive.”