A Tale of Two Cottons
June 15, 2011 The rising cost for cotton fiber during the past year has created a best of times/worst of times situation for our industry. Simply put, we are experiencing a classic economic scenario in which decreased supply and increased demand have caused raw fiber prices to escalate. On a deeper level, the root of the price volatility stems from the dual nature of cotton, which competes both as an agricultural commodity and textile fiber. Ironically, the cause of recent volatility will likely be the cure. Cotton prices may attract growers to return to it as a crop, which will increase production, reduce the gap between supply and demand and ease fiber prices to a reasonable, yet competitive level.
The crop/fiber duality of cotton is often unappreciated by those outside of the industry, and this misunderstanding can result in radical speculation about the ramifications of current cotton fiber price increases on the supply chain, most notably the consumer. Cotton Incorporated has been actively educating various aspects of the supply chain—and the media—to ensure that cotton is represented fairly and accurately in any discussions about fiber and retail apparel pricing.
The first point is that cotton, as a crop, competes for acreage with other crops, primarily soybeans and corn. With the exception of the spike in 2007/08, cotton prices were relatively low compared to long-term average in the five years leading up to the recent surge in prices. From 2004/05 through the end of 2009/10, cotton prices averaged only 63.3 cents per pound. This time period of lower cotton prices coincided with sharply rising prices for corn and soybeans. Corn prices increased 134% and soybean prices increased 105%, driven by demand related to ethanol production in the U.S. and consumers in emerging markets eating more meat. Growers, like any businessmen, gravitated toward the more lucrative crops.
The resulting decline in world cotton acreage and production was a contributor to the lowest stocks-to-use ratio in 15 years—36.3% for 2010/11 crop year. In addition, demand has rebounded from the recession. Low supply and high demand produced the record prices we have seen in 2010/11. The A-Index has averaged 158.5 cents/lb since August. The previous all-time high (A Index back to 1966) was only 119.4 cents/lb.
The futures market is already anticipating this as the price for near-term delivery (May contract) is trading at a much higher price 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.
We recognize that the impact on the retail market will be significant. Using data over the past three decades, Cotton Incorporated analysts have determined that fiber prices do impact retail prices but with a historic lag of one to three years. The effects depend on the product and the retail channel of the product.
A theoretical model developed by analysts at Cotton Incorporated reveals that cotton’s contribution (by weight) to any apparel price increases at retail would be between 53 cents for a tee shirt and $2.42 for a pair of denim jeans. This model assumes the retail margin remains intact. It is important to note that apparel retail prices have decreased in the last 15 years, even as the costs for other consumer goods and services have gone up. A recent survey we conducted indicates the cotton contribution to any increases is well below the prices consumers say they would pay for these items.
The cotton fiber volatility we have seen in recent months is likely to continue until at least this year’s harvest. As competitive fibers attempt to seize an opportunity to gain share, it is crucial that the facts of the cotton pricing situation remain clear and grounded.
As a company representing all aspects of the industry, Cotton Incorporated is committed to sharing the most up-to-date information with our constituents and to keeping media focused on the facts, rather than speculation.
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