Cotton prices have been fallen 35% since the beginning of 2012, leading some to believe that the price of cotton apparel will soon drop. Fabric is made from cotton and clothing is made from cotton fabric, so a lower price for cotton should lead to lower on-the-rack soft goods prices as producer input costs decline.
For certain home textiles products, the link between cotton prices and final cost is strong. Cotton fabric is the largest input cost for a white sheet or towel, for example. For higher value added goods or fashion goods, cotton is less important. Trims, consumer preferences and the labor intensiveness of the product can all be comparably important costs.
Much of the savings from cotton costs are being used by firms to offset a witches brew of high inflation and rising labor costs. Energy costs are also up, particularly in nations with underdeveloped infrastructure, which tend to be where producers head to stave off high labor costs. Falling cotton prices are keeping final prices stable, but not bringing them down.
Coming out of the price spike of 2011 and the recession, many producers have opted for less reliable factories or factories with lower standards and quality. Rather than transferring cotton savings to consumers, producers will likely send orders to better firms first. They will also change blends, reducing the amount of synthetics blended into their products to pre-2011 levels. FOB may not be declining, but product quality will be increasing.
On the back end, daily cotton market changes will not impact orders already in the pipeline. The USDA Cotton futures price is the number publications usually talk about. This is a contract price for cotton that has not yet been harvested (right now the benchmark is for the July contract), not a reflection of what a mill or ginner is actually paying for a bale. It gives an idea of the market direction, with a lead time of months before it directly impacts input costs.
The relationship between cotton costs and apparel costs is further muddied by the existence of large stocks of cotton. The current stockpile estimate for 2012/13 growing season is over 14 million bales, which is more than half the expected demand. Much of the cotton being sold is priced based on older futures contracts. Because contract prices have been falling for the past year, cotton bought today is likely more expensive than the current price.
Price changes that are linked to immediate fluctuations in futures contracts are inappropriate and likely speculative, or an attempt to hedge against future losses. One potential exception is if a factory’s fabric supplier has sued to renegotiate their contract – a trend that has been growing in recent years. In this difficult situation, the factory will end of having to eat cotton price increases. Again, it will not impact immediate shipments as long as the factory has enough cash on hand to cover the increase, but it can influence long-term profitability for factories and lead to higher costs down the road.
Understanding cotton futures impact on pricing can mean better long-term business decisions. Look for Sourcing Journal’s upcoming article, in which we explore the factors that drive the cotton futures price.