Note: This article was published last year in sourcingjournal.com, and cotton prices have moderated since then. Even so, inflation continues to gain steam. So what's the source of the inflation? Read below to get my take on it. Also, I was interviewed by cottongrower.com
about this article on their "Cotton Companion" podcast. Have a listen. Link after the article.
It’s time for a dose of reality.
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’s a new bugaboo about cotton these days: rising prices. And it seems to be troubling everyone. Today, the daily price of cotton fluctuates 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 really jumped. It’s good news for farmers but bad news for the textile and garment industry, right? Not so fast.
Lost limbs
To listen to folks throughout the textile supply chain talk about the rise in cotton pricesis like listening to people complain that they lost a limb. “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!” But they always do, thanks to the availability of cheaper synthetic fibers to help cushion higher cotton prices.
But there’s more to the story. Shifting the blame to cotton misses the point. It’s a little like perceptions some people have that cotton is a dirty fiber. Of course, it’s all spin and nonsense–but it makes for a good story that marketing teams at apparel companies can use to demonize cotton. Moreover, such hyperbole shoves the blame for climate changefar away from the core products of apparel companies. 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. So, don’t blame cotton.
What’s more, just because cotton prices are high doesn’t mean that farmers are receiving windfalls. There’s a supply chain that revolves around cotton farmers to handle 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’s 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’s the real story. What’s more, consumer inflation is up in the United States—led by retail apparel. Huh? 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.
Economic reality
So, ultimately, we’re back to economics. Supply, demand, production efficiencies, consumer tastes, and prices. What’s really odd, though, is the price of cotton has jumped while the imported price for clothing has declined. How does that work?
Oh, and guess what? The same may be said for imports of yarn and fabrics.
So what gives? Clothing imported this year was made with cotton from the previous season. Indeed, cotton started its run in early 2020, which would mean that such increases would be reflected in 2021 apparel import prices. But actually, the opposite occurred.
A key question 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. However, government stimulus programs were pumping money into economies around the world and setting the stage for inflation to creep into supply chains beginning with raw materials.
And then there’s 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. Yeah, the whole Xinjiang forced labor issue is still a thing. 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. Add in late harvests in the U.S. and a troubled crop in India, and we’re set up for higher prices.
And of course, this year, demand for apparel is up. In fact, apparel imports in 2021 will top levels registered in 2019. They’re 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.
Sticking the Landing
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 wasn’t 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 shouldn’t 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’s an example: 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’s 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. Even so, you may say, “yeah, but my overall raw material costs, including yarn and fabrics, keep going up, killing my margins.” Of course that’s 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’s 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’s a little like comparing gasoline to an automobile. Yes, gasoline makes a car run, but the reason we use gasoline in the first place is to power our cars so we can travel places. Of course, we notice the gas price at the pump when filling up, but we fill up regardless as we have to get somewhere. We may not like the gas price, but that’s irrelevant considering that we have to go somewhere for an appointment or work.
Let’s be real
So, do rising cotton prices really 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 can’t be passed on to consumers. In that case, there’s the rub.
However, supply chain price fluctuations move both ways—from the top and bottom. What about all the products that won’t make it through ports in time for the holiday selling season? Are we setting up for a possible fire sale come January? Maybe. And suppose the holiday selling season itself is only so-so. 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.”
This article was originally published on December 17, 2021 in sourcingjournal.com.
Here's the link to the podcast about this article on cottongrower.com: