Follow The Bouncing Cotton Boll

The recent fluctuation in the futures prices for cotton is deeply unsettling, as there is little precedent for the wild swings in prices we have experienced over the past few weeks. Many analysts have blamed the entrance of index funds into the market for the extreme movements in the price of cotton on the ICE exchange. Although this may be true, there are a number of other factors that have helped to wreak havoc on cotton prices.

Over the past few months, a sustained rise in prices for textiles has helped to build uncertainty in the cotton market and helped to fuel sharply higher prices for cotton. There is noticeable concern in textile circles that rising prices for basic textiles could translate into lower levels of consumption by consumers in the U.S. and elsewhere. This concern is well founded, as higher wholesale prices will eventually translate into higher consumer prices, resulting in potentially lower levels of consumer purchasing — thus reinforcing reduced demand for textiles over time.

According to new data released by the U.S. Bureau of Labor Statistics (BLS), wholesale prices for textiles and apparel rose sharply in March from comparable year-ago levels. As measured in the BLS Producer Price Index (PPI), prices for yarns and threads rose by a steep 5.4% over March ’07 levels, while at the same time prices for greige fabrics, finished fabrics and industrial textile products each rose by 2.2%, 1.3% and 1%, respectively. For textiles, much of the increase is a direct result of raw material and energy costs. Though it can take months for textile prices to rise as a result of high fiber prices, it is interesting to note that there is a strong correlation between rising prices for textiles and cotton. With cotton prices rising more than 25 cents a pound since early 2005, textile producers have little latitude to absorb the higher costs, as margins for textile producers have remained razor thin in recent years.

Caption (photo):
Robert P. Antoshak

Sidebar (add table):
Comparison: U.S. Cotton Prices vs. Textile PPI Monthly Average 2005-2008

At the same time, these increases follow nearly five years of declining wholesale prices for apparel and mark a significant about-face in prices. From 2002-2006, consumer prices for apparel actually declined, but beginning in 2007 prices began to rise at a gradual, steady rate. Consumer prices as measured by the BLS Consumer Price Index (CPI) indicate that some price increases were passed on to consumers, though the increases were certainly less dramatic than those exhibited by cotton and textiles.

There is little doubt that consumers have already felt the effects of higher prices as stated in the most recent CPI report. The February 2008 CPI for apparel rose by a significant 0.5% over January levels. However, more importantly, over the past six months the compound annual rate for of growth in consumer prices for apparel rose at a steep 2.3%.

Needless to say, consumer sentiment is already in the doldrums. The Conference Board, a leading U.S. business and consumer research organization, said last month that consumer confidence has fallen to its lowest level in more than five years. The Conference Board Consumer Confidence Index, which had declined in February, fell sharply in March. The Index now stands at 64.5 (1985=100), down from 76.4 in January. In March 2003, the Index stood at 61.4 when consumer sentiment was still mired in the effects of the 9/11 tragedy.

The net result: a potential for weaker demand for clothing and, consequently, textiles over the coming months. The price increases posted for apparel are far less severe than those posted in cotton and textiles, suggesting retailers remain reluctant to raise prices too fast out of fear of making a bad situation even worse. Nevertheless, if apparel demand proves anemic in coming months while raw material costs continue to rise the entire textile-retail complex may be in for a serious bout of “stagflation,” resulting in declining profits and a potential shake-out of weaker companies in the supply chain.

So the issue, then, is if textile price increases will result in sustained higher prices for cotton. But, perhaps more importantly, will higher prices for textiles result in lower levels of consumption over the long haul? Such a development would most certainly result in lower prices for cotton. It is this supply-demand component of the supply chain that may require the most intense analysis in the coming months.

In the meantime, the recent fluctuations in cotton prices may continue, a prospect of worry for all concerned.

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