Soaring Cotton Prices
You may soon feel the financial sting as soaring cotton costs work their way from the cotton fields, to the textile mill, to the apparel manufacturer, to the retailer, and finally to that new pair of pants or dress you’ve had your eye on.
According to the National Cotton Council, the international price of raw cotton, as indicated by the Cotlook “A” Index, has increased 145.9% from April of 2010.
In the U.S. Bureau of Labor Statistics Producer Price Index (PPI) report released May 20, 2011, the cost of processed yarns and threads has increased 28.8% from April 2010 while the cost of finished fabrics has increased 7.4%. It further shows that the cost to retailers of women’s, girls’, and infants’ apparel increased 0.7 %, men’s and boys’ apparel increased 2.3%, and textile house furnishings increased 2.6%.
Apparel costs for the consumer have held relatively steady from this time last year. The U.S. Bureau of Labor Statistics Consumer Price Index (CPI) report released May 13, 2011, shows the average cost to the consumer of apparel has increased only 0.1% from April 2010.
But the clothes you buy today were made from cotton that was purchased months ago. That lower priced cotton has now worked its way through the manufacturing process. From raw cotton, to thread, to fabric, to finished apparel, to the retailer’s rack, each company along the way must decide how much of the increase in the price they paid for materials used will be passed on and how much they will absorb. Setting an item’s price is a delicate balancing act between pricing it high enough to cover costs and maximize profits, versus pricing it so high as to drive away consumers.
With increasing prices for food and fuel already taking a larger portion of consumer income, the soaring cost of cotton may have caused that balancing act to reach a tipping point where costs cannot be covered without driving away customers. There was an indication of this Friday when comments by several large retailers regarding the rising cost of cotton triggered a mass sell-off in apparel stocks.
GAP Inc. (NYSE:GPS), the largest U.S. apparel-specific retailer by sales, was the largest decliner in the Standard & Poor’s 500 Index Friday when it closed at $19.26 a share, down 17.3%. In their First Quarter Earnings Report for Fiscal Year 2011, released May 19, 2011, GAP stated, “the company expects business performance during fiscal year 2011 to be heavily impacted by pressure from sourcing cost inflation.” They go on to say that the increase in their cost of goods was higher than expected. “The company now expects product costs per unit to be up about 20 percent in the back half of the year, which will more than outweigh retail price increases.”
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