Cotton gets maligned for many things in our industry. Still, any criticism typically leveled at the fiber originates from preconceived notions that are hard to dispel or, at times, a simple lack of understanding. After all, from a supply chain perspective, cotton is a remote input compared to the garment business and is easily misunderstood.

There is a new fear about cotton these days: rising prices. 

And it seems to be troubling everyone. Today, the daily price of cotton fluctuates from around $1.15 to $1.20 per pound. A year ago, the cost of cotton was as low as 50 cents a pound. So, the price of cotton has realistically jumped.

Some say it is good news for farmers but bad news for the textile and garment industry, right? Not so fast.

We constantly listen to folks throughout the textile supply chain talk about the rise in cotton prices is killing the business. Interviews and debates take place. “How dare they raise prices! Don’t they know how hard it is to compete in this market! We can’t afford to pay those prices!”

The new trend is to blame Russia – Ukraine conflict for high cotton prices. 

But the truth is neither Russia nor Ukraine are significant producers or consumers of cotton. Both import products. The annual cotton product imports (apparel, towels, bedsheets, etc.) are valued at roughly $3.0 billion and $500 million, respectively. 

Cotton is tied to both countries in the form of product imports, and the current conflict is expected to slow consumer demand and further exacerbate mills’ problems across the globe, including rising costs for production (higher fuel prices), yarn manufacturing, electricity costs.

Russia and Ukraine's cotton product imports are expected to fall, potentially lowering product exports and therefore consumption for major suppliers including Bangladesh, China, and Turkey. And this is a serious problem for the industry.

It is worth a note that Russia and Ukraine's imports pale in comparison to other major markets, including the United States and European Union. In addition to lower expected product import demand from both countries, the conflict has driven already significant inflation even higher, with fuel and electricity prices witnessing volatile upward movements. Rising costs and logistical concerns in and around the Black Sea and Bosphorus may complicate the flow of cotton products and textiles, which were already experiencing issues with container port congestion. 

But there’s more to the story. 

Shifting the blame to cotton misses the point. It is a little like perceptions some people have that cotton is a dirty fiber. We all know it is all spin and nonsense–but it makes for a good story that marketing teams at apparel companies can use to demonize cotton. 

Then there is such hyperbole that shoves the blame for climate change which is far away from the core products of apparel companies. 

For the Supply chain, all these factors contribute to justifying the price increase. In fact, the real culprit is found in far-flung, complicated, multi-stage supply chains, comprised of all kinds of suppliers and middlemen—all incentivized to push a little added cost onto their customers when they can. 

A key question that remains is why cotton chose to run up when it did. After all, by any measure, 2020 was an awful year. Many economies were in lockdown and the shipping problems that affected the industry so severely this year were months away. 

One key question is why the price of cotton increased when it did—given that demand in 2020 was weak with economies in lockdown, and in 2021 the industry was affected by shipping problems. 

There could be a few reasons worth noting. 

The government stimulus programs were pumping money into economies around the world and set the stage for inflation to creep into supply chains beginning with raw materials.

And then there is simple supply and demand. For instance, China purchased a lot more U.S. cotton to fulfill the needs of mills looking to avoid using Xinjiang cotton. 

Xinjiang cotton makes up about a quarter of the global cotton crop. Still, it has been virtually excluded from the international markets from a pricing perspective. It is often used by Chinese mills only for domestic consumption. As such, this creates an artificial shortage. Compounded with this the late harvests in the U.S. and a troubled crop in India, we are all set up for higher prices.

And of course, this year, demand for apparel is up. Apparel exports in 2021 topped levels registered in 2019. They are certainly way higher than imports recorded in 2020 at the height of the pandemic. Yet increased demand sets up higher prices, especially when coming off a down year. In turn, it stands to reason that demand for the various inputs of the finished garment may go up.

So, ultimately, we are back to economics. 

Supply, demand, production efficiencies, consumer tastes, and prices. What is odd, though, is the price of cotton has jumped while the imported price for clothing has declined. How does that work?

So, what gives? Clothing imported this year was made with cotton from the previous season. Indeed, cotton started its run in early 2021, which would mean that such increases would be reflected in 2022 apparel import prices. But the opposite occurred.

So, don’t blame cotton.

And please do not think that just because cotton prices are high means that farmers are receiving windfalls. Do not forget that there is a supply chain that revolves around cotton farmers handling the cotton once it’s been harvested. Think about it: there are intermediary companies like merchants, gins, warehouses, transportation firms, and other companies that also receive a cut of the price. What is left for farmers is a lot less than many may realize.

Instead of complaining about higher cotton prices, what about lower prices for garments? 

That is the real story. What’s more, customer inflation is up globally led by retail apparel. It makes little sense until we consider the impact of the port delays the industry has suffered through and the resulting higher costs for brands and retailers.

Nevertheless, to blame cotton for industry inflation is to miss the point. Supply chain disruptions and sharply higher shipping costs are the critical reasons for higher inflation. In turn, cotton prices move up and down all the time. After all, it was not so long ago that cotton traded at just 50 cents a pound. Sure, $1.20 a pound is more than double that, but the give and take in raw materials should not be demonized. Just better understood. For brands, this means working closely with textile suppliers to better understand how their margins are affected. Forget the spin and embrace facts.

Here is an example: 

We all know a pair of jeans contains about 1.5 pounds of cotton. So, when the price of the cotton included in jeans is about 50 cents per pound—like it was at the end of the first quarter of 2020—the total cotton cost is about 75 cents per pair. Moreover, when cotton recently topped $1.20 per pound, that translated into cotton costs of $1.80 per pair of jeans.

But when a pair of jeans sells at, let us say, $80 wholesale, a jump in cotton costs from 75 cents to $1.80 per jean still represents a tiny percentage of the price of wholesale jeans. Now you may say, that my overall raw material costs, including yarn and fabrics, keep going up, killing my margins. Of course, that is true. But it places the price issue where it should be with spinners, weavers, and knitters—because each stage of the supply chain will try to add a little more to the prices they charge for their products. The result? A cumulative increase in the cost of materials for apparel companies.

It is human nature to want to pay only for the perceived value of a product. Indeed, such perceptions may ignore economic realities—ignoring reality is undoubtedly a human trait. But sociology aside, perceptions often override fact when it comes to cotton.

It is like comparing petrol to an automobile. Petrol makes a car run, but the reason we use petrol in the first place is to power our cars so we can travel places. Of course, we do notice the petrol price at the petrol pump when filling up, but we fill up regardless as we have to get somewhere. We may not like the petrol price, but that is irrelevant considering that we have to go somewhere for an appointment or work.

So, do rising cotton prices harm apparel companies? 

The short answer is not directly. The long answer is that higher raw material prices allow segments of the supply chain to simply raise their prices. However, those increases harm apparel companies by raising costs in tandem and squeezing margins if those increases cannot be passed on to consumers.

However, supply chain price fluctuations move both ways—from the top and bottom. What about all the products that will not make it through ports in time for the selling season? In that case, there will be even more merchandise to offload somewhere. It could be a mess.

And the humble cotton farmers may take it in the neck once again as demand for new products dries up as old inventory is worked off. Want lower cotton prices? They call it “demand destruction.”

But the reality is that cotton prices did go up. 

The main factor for this could be an increase in fiber consumption, first, a growing world population grew from around 6.1 billion in 2000 to 6.85 billion in 2010 and that was expected to reach 7.6 billion by 2020. 

Second, it is also expected that real global GDP will continue to grow by around 3% annually. This, in turn, will result in higher per-capita consumption of fibers. According to one estimate, global consumption increased between 2000 and 2010 from 8.8 to 11.6 kg per capita and was to continue to do so reaching 13.1 kg per capita by 2020.

Thirdly, cotton is competing with food crops for limited arable land, the large majority of additional fiber consumption will have to be met by man-made fibers. 

While cotton’s share in global fiber consumption will continue to decrease in absolute terms, cotton consumption will continue to rise, especially by improving yields.

An old saying in commodities markets is that the best cure for high prices is high prices. The reason is that higher prices motivate producers to increase supply while they simultaneously depress demand.

RELATED TOPICS:#Apparel,Sanjay Lal