Higher Cotton Prices Loom

Higher Cotton Prices Loom

Apparel was at the forefront of the low-cost, outsourced manufacturing revolution, and the business of making shirts in South Asia and sweaters in Central America only got cheaper in recent decades, helping fuel a major air cargo growth market. A polo shirt that might have cost $6.40 for apparel makers in the 1960s cost half as much by 2009.

But demand for cotton is up 40 percent in the world’s emerging markets this year and prices soared in 2010. Cotton prices grew more than 70 percent in the first 10 months of 2010, pushing past $1 a pound to a 15-year high. Although spot prices for future cotton deliveries pulled back somewhat later in the year, the higher costs were starting to reach consumers, and the message in the apparel industry is clear.

“The days of inexpensive apparel are over,” said Peter McGrath, executive vice president of product development and sourcing at J.C. Penney.

“Speculation is playing a big role in the rise of cotton prices,” McGrath said. “Cotton is the new white gold. Demand outweighs production. Demand from the U.S. no longer sets the world’s prices.”

That’s a troubling message for the air freight sector, which has built an entire industry on apparel, from the high fashion that helps fuel higher-priced international air express shipping to a range of apparel shipping services that require specialized handling and help fill aircraft from Asia, the Indian subcontinent and Central and South America.

In the apparel business, the biggest impact from higher cotton prices will be in the discount sector, where a new paradigm is developing, McGrath said. “The least expensive goods will see the biggest price increases,” he said.

Although rising prices help cotton producers in India and Pakistan, they produce headaches for U.S. importers of Asian-made apparel. Charles Keenan, director of imports for IC Isaacs & Co., which manufactures Marithe Francois Girbaud garments, said although volumes are higher than during the recession, sales are still not strong. But makers of cotton apparel are being squeezed by their higher production costs.

Until recently, Keenan said, his company was making jeans in China for just $7 a pair — and selling them at healthy margins in the U.S. But cotton prices have been rising so fast, it’s hard to forecast his future costs. “If I speak to one (cotton) supplier and then call another supplier, by the time I call back the first person, the price he asks is even higher than it was (just a few minutes before).” With no time to negotiate prices, he just has to “pull the trigger.”

McGrath believes the pricing surge will lead to consolidation among providers in 2011. From retailers to spinners, the number of competitors will decline. Although cotton prices will decline somewhat by mid-2011, they will remain higher than before the recent inflationary spurt. Apparel prices also will rise, and apparel supply chains will become leaner in an effort to make up for the higher cost of cotton. Finally, McGrath said, private brands will grow at a faster pace than conventional labels as retailers use them to keep costs down.

Apparel companies also will source a growing share of their global supply chains from outside China as production costs there escalate. Alternative low-cost countries such as Vietnam, Cambodia, Bangladesh and Indonesia are likely to attract a larger share of global apparel trade.

Pakistan, already the world’s largest yarn supplier with a 38 percent share of that market, “has a huge opportunity to add value by making apparel” as well, said Shahid Nazir, CEO of Masood Textile Mills, based in Faisalabad, Pakistan.

Producers in Egypt, where cotton business is centuries old, also hope to gain ground.
Alaa Arafa, chairman of Egypt’s Ready Made Garment Export Council, said plans call for Egypt’s garment industry to double its apparel exports over the next four years. “The China trade is bound to move to other locations, including Egypt,” Arafa said,

Although wages in China are rising, they remain quite low, so “many people (in China) would rather do anything rather than work in textiles.” Outsourcing production to Vietnam and Indonesia will grow, Arafa said, but “those countries are not enough to fill the gap” in global demand for apparel.

Contact Alan M. Field at alanmf1233@verizon.net.