The Rising Price of Cotton

There has been a lot of talk, and worry, lately due to the dramatic rise in cotton prices with speculation regarding the impact on cotton fabrics, and therefore, the cost of garments, including Cotton Nursing Scrubs.  We've paraphrased a recent article by Cotton Incorporated here, to help our customers understand what the hubbub is all about.

 

"Cotton prices certainly are a hot topic in the apparel and textile supply chain. Futures prices generally have traded in the range of $0.45 per pound to $0.80 per pound for the past two decades, but prices soared at the end of 2010, exceeding $1. This momentum has carried into 2011 as New York futures prices exceeded $2 per pound and have remained near there to present. The current state of the cotton trade prompts three essential questions: 1) why did cotton prices increase, 2) will prices stay at these levels and 3) what will be the effect on the retail market?

A number of factors have contributed to the jump in cotton prices, including the weakening U.S. dollar, which affects all commodity prices; the rise in prices for alternative crops that growers can cultivate, such as corn and soybeans; and especially the cotton supply/demand balance in the U.S. and worldwide. Of these, the supply/demand balance factors most significantly. 

Shrinking supply, burgeoning demand

When inventories fall relative to the usage of cotton, prices rise; and when inventories increase compared to demand, prices tend to fall. From 2000 to 2008, the world had a plentiful store of cotton in its inventories – averaging more than 50 percent of the global demand for cotton. That began to change in the 2009 growing season, when high prices for corn and soybeans led many growers to reduce cotton plantings and increase acreage to these alternative crops. 

As such, global production fell short of demand and inventories fell sharply. China and India yielded smaller crops than expected, leading to increased reliance on U.S. exports to meet growing global demand. The rush to buy U.S. cotton early in the season last August resulted in the U.S. essentially selling out of the crop. Prices soared to new heights.

The pricing game

In order to increase the supply of cotton, cotton prices must be competitive with key alternative crops. Corn and soybean prices have been strong for several years, so cotton was merely catching up. Today cotton prices are competitive with alternative crops, and planting surveys suggest an increase in U.S. and global acreage for cotton. With “normal” weather, it is expected that the world’s cotton production probably will exceed global usage, which should cause prices to ease somewhat. 

The futures market is already anticipating this as the price for near-term delivery – May contract – is trading at $0.40 cents to $0.60 cents higher than prices for the upcoming 2011 crop (October and December contracts). Even so, new-crop prices are much higher than historical averages and most analysts believe that we are unlikely to return to the average levels of the past decade.

The retail effect

The impact on the retail market will be significant. Global yarn and fabric prices have already spiked in response to the gains in cotton prices. Additional upward pressures have been generated by rising labor costs and a weaker U.S. dollar.