California Apparel News

U.S. growers and manufacturers grapple with rising cotton prices and decreasing global supply.

U.S. cotton growers could be well-positioned to benefit from a supply-and-demand crisis over global cotton prices—but the situation has caught apparel makers in the middle.

After months of escalating cotton prices, India—the second-largest cotton exporter, after the United States—announced plans to suspend cotton exports until domestic prices decrease and supply increases.

India’s ban on cotton exports could leave textile-producing countries such as China (the largest market for both American and Indian cotton) in the lurch. “The deficit created by India has to be made up by the U.S., which would increase U.S. exports, increase demand and push prices up. We’ll have to wait and see,” said Gary Raines, vice president of economics and analysis at FC Stone Fibers and Textiles, which provides execution and advisory services in commodities, currencies and international securities.

In recent months, increasing demand and diminishing supply have steadily pushed cotton prices back up toward pre-recession levels, according to John Johnson, director of public relations and legislative affairs for the Plains Cotton Cooperative Association.

The price increase is causing mills to raise fabric prices, leaving manufacturers and brands to find ways to cope with the increased costs.

“I’ve been hearing from clients that cotton prices have been going up since the beginning of the year, but just recently prices have gone up about 20 percent,” said Paul Cavazos of New York–based Olah Inc., which represents textile and manufacturing companies.

The slowly recovering economy is driving production of textiles and fiber, according to FC Store’s Raines.

“The U.S. economy and the global economy tanked in 2008 and 2009, and cotton just fell off a cliff,” he said. “But cotton has staged a pretty impressive rebound.”

Cotton, which had been selling for 40 to 45 cents per pound, jumped to nearly 90 cents per pound in April. But while the price of cotton was down, farmers in the United States and abroad planted fewer acres of cotton. “Fewer bales produced resulted in a smaller global supply,” Raines added.

Making matters stickier, there is no stockpile of cotton to be had. “There is literally none of the 2009 crop of [domestic] cotton left. It’s all gone, but demand for cotton is still growing,” the PCCA’s Johnson said. The result is cotton prices have hit a two-year high and could continue to climb in 2010.

When India announced plans to immediately cease all cotton exports, cotton spiked 4 percent in one day to 87.1 cents per pound—the highest it has been since early 2008. In the wake of India’s announcement, Pakistan said it could see the closure of 70 percent of its spinning plants by the end of May because of a cotton shortage and the prohibitively high cost of importing cotton.

India’s ban on cotton exports puts a fine point on what was already a loaded situation. “It throws a wrench into the works. Immediately it takes 1 million bales [of cotton] out of circulation, and no one knows how long it may last,” Cavazos said. That uncertainty makes the entire cotton chain skittish and pushes prices even higher.Coping with higher prices

In the past year, cotton prices have soared by 65 percent, according to reports. In February, cotton prices were up nearly 48 percent from the same time in 2008.

Elevated cotton prices make for more expensive fabric and yarn and could result in pricier garments.

“Everything is copacetic when cotton is between 68 cents and 73 cents per pound. Anything above that, like what we’re seeing now, and mills that are vulnerable to market pressures are going to have a hard time, and they’re going to pass some of that difficulty along to their clients,” Cavazos said.

Jeff Shafer, owner and designer of the Agave premium denim and knitwear label, estimates higher fabric prices will increase the cost of producing each pair of jeans by $2 to $3. “Higher prices means someone is going to get squeezed—and right now I’m getting squeezed,” he said. “There’s no way my buyers will accept a price increase. I’m going to have to lower my margins until we have a chance to raise our prices. Unfortunately, I don’t see that happening any time soon.”

Even the luxury Pima cotton business is affected. Supima, the company founded to promote the use of American-grown Pima cotton, is reporting a 462 percent increase in international demand for U.S.-grown Pima cotton (see related story here). Supima cotton prices have also increased, prompting Shafer’s knit fabric vendors to raise their prices by about 30 percent.

Brian Meck, vice president of sales and marketing for Fessler USA, an Orwigsburg, Penn.–based private-label knitwear manufacturer, said the cotton-price increase has wreaked havoc on his entire supply chain. “We’re scrambling to update costing, and we’re negotiating with our dye houses to work on dyeing and finishing costs. We base our pricing on market prices and expect changes to be minimal. We didn’t foresee this coming at all,” he said. Complicating matters, in response to cotton’s price jump, synthetic-yarn importers have hiked their rates in kind. “Some importers are taking advantage of the situation. We were forced to pay an immediate 30 percent increase on synthetic yarn from India. It’s ridiculous, but we have orders to fulfill and we had to pay the inflated price,” Meck said. Fessler, which produces 4 million T-shirts per year, will increase its pricing immediately. “We’re trying to figure out how to work with our customers on pricing and see if they will share the burden with us,” Meck said. Customers with orders that Fessler accepted at pre-spike pricing can decline price increases, he said, but new orders for T-shirts and dresses will see increases of approximately 5 percent or more. “If you’re producing 5,000 to 10,000 of one style, an increase like that can be significant,” Meck said.Shifting the balance back

Kim Kitchings, senior director of corporate strategic planning and program metrics at Cotton Incorporated, said price increases don’t necessarily have to be passed to the retailer or end consumer. “Cotton Incorporated recently did an extensive analysis of apparel costing. We found that while raw-material costs are typically the most significant [between 38 percent and 70 percent of freight on board], an increase in this area need not translate to increased costs to the retailer or the consumer.” A range of cost-savings balances can be made at other phases of the supply chain, she said. “A spike in raw-material cost can be offset in a variety of ways, such as changing the country where the goods are made, putting more efficient manufacturing technologies in place or by reducing markups, for example.”

Analysts said there is some hope that cotton prices will settle after the spike. Higher cotton prices mean more farmers around the world could plant the crop and beef up supply levels.

For the 2009/2010 season, the United States is projected to produce 12.15 million bales of cotton—“the smallest domestic crop in a quarter century,” FC Stone’s Raines said. Indeed, this season’s projection is down slightly from 2008/2009’s yield of 12.82 million bales and down considerably from 2007/2008’s yield of 19.21, according to Raines. (The cotton season is measured in a marketing year—meaning August to July—rather than a calendar year, Raines explained.)

“Increased spring plantings occurring now are likely to result in a substantially bigger harvest this fall, in the 2010/11 marketing year,” he said. “Bigger supplies could result in lower prices.”