Cotton Blend Rates Could Increase Due to High Prices

Yesterday on Today’s Topic, we heard from John Devine, economist with Cotton Inc. on the near-certain price increase in cotton goods at the retail level due to historically high cotton prices at the producer level. Today, Devine explains what’s causing the upswing in the price of fiber:

“What we’re looking at at the world level right now in terms of overall supply/demand, we’re looking at the tightest supply situation we’ve had in a decade. A lot of that can be traced back to the tight supply/demand situation we have in China right now. Some of the tightness in China can be traced back to the fact that they’ve had lower cotton acreage over the past couple of years, and at the same time their mill demand has increases as the world economy has rebounded.”

Cotton stocks continue to decline, helping support the current prices:

“China’s the world’s largest importer of cotton, and the US is the world’s largest exporter of cotton, and a lot of our cotton has been going to China. However, US sales have been very strong for a lot of our major customers for this crop year. due to the very strong demand for US exports, and what we’re looking at in terms of situation right now is the US crop is virtually 100% sold. When we consider the current amount of current export commitment we have in addition to US domestic mill demand, due to the fact that we’ve sold so much of our domestic crop, looking at really digging into a little bit deeper into our stocks, throughout the remainder of the crop year, and this has put a lot of pressure on prices not only in the US but across the world, as the situation has become tighter and tighter.”

China is the largest importer of cotton, and subsequent user. There have been rumors that Chinese mills are considering higher blend rates with synthetics to make that expensive cotton go further. Devine explains:

“That is always a possibility and that is something that we’re keeping a close eye on here at Cotton Inc., of course that is something that is near and dear to our heart. Unfortunately, with the data we have we won’t be able to get a very good idea of the extent to substitution of fibers until we get a few months down the road.”

Whether the American Consumer will tolerate higher blend rates remains to be seen. Devine presented his economic findings at the Beltwide Cotton Conference in Atlanta on Wednesday.  Read:  Supply Chain Insights - China:  Center of the Cotton Market (.pdf)

Simple Supply Side Economics Certain to Show up in Cotton Textiles

One of Newton’s laws on physics says that for every action, there is an equal and opposite reaction. Well, that may be true for physics, but for economics, and cotton in particular, it’s more like…for every action, you’ll see the same reaction on the other side.

John Devine, economist with Cotton Inc. in Cary, NC has been keeping a close eye on cotton prices at their historical highs, and what that will mean on the consumer end. Devine says that it’s almost a certainty that we’ll see higher prices for cotton garments and textiles:

“Certainly it’s gotten a lot of people’s attention regarding how large this price increase might be on the consumer end, and also when this price increase might take place.”

Devine says that the raw fiber to finished product chain is long, but those price increases at the retail level could be showing up this year, possibly by summer:

“Typically when we look at the cotton supply chain, it will take anywhere from eight to 12 months for orders placed by retailers and brands to show up on their shelves.”

Devine outlines what Cotton Inc. believes will be a typical price increase for a cotton t-shirt:

“So, when we’re taking a look at prices we need to keep in mind that cents-per-pound at the fiber level is completely different than what we’re looking on a retail store’s shelves, in terms of the overall size of the price. Here at Cotton Inc. we’ve run some analysis on a series of different apparel items to get an idea of how much cotton fiber goes into certain garments. So, to take a look at t-shirts, for example, involves a little less than half a pound of cotton to manufacture that item. so we’re looking at a price increase of about .85 cents per pound which is what we’ve seen in prices in December relative to what they were in August. That would give us a theoretical markup of about .35 cents due to the increase in fiber prices alone. Which, of course, is significant if you’re selling millions and millions of units, but in terms the over all size of the price increase at retail, it should not be very large.”

And what about that American staple-denim jeans?:

“Denim jeans, certainly a very important use consumer consumption of cotton fiber. And if we take a look at a pair of jeans, there’s about two pounds of cotton that goes into manufacturing a pair of jeans. Again, taking a look at the increase in cotton prices that we’ve had just since this crop year began in August, looking at about .85 cents per pound increase, with about two pounds of cotton going into those jeans, it’s about $1.60 increase could be expected, or could be predicted in price of jeans due to increase of the price of cotton fiber alone.”

We’ll visit more with Cotton Inc.’s John Devine tomorrow on Today’s Topic.

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