December 28, 2010
High fiber prices are expected to create some upheaval throughout the supply chain in the coming months.
Rising costs of raw materials deep in the supply chain haven’t yet made their way through to retail apparel prices, but that can’t continue indefinitely, experts said. Volatile cotton prices in the last year have soared to record highs, wool prices are higher than they have been in years and synthetic fiber prices, while not seeing upward pressure anywhere near the natural fiber industries, are also elevated.
“Once these higher fiber prices filter through the supply chain, it’s going to be painful,” said Gary Raines, vice president of economics and analysis with FCStone Fibers & Textiles. “Who’s going to crack first? Will consumers willingly pay higher year-over-year prices for apparel? I’m not sure. 2011 is shaping up to be unlike any year we’ve seen. There is a major disjoint between retail trends and what’s happening on the fiber side.”
Prices will eventually come down from current elevated levels, but it could take some time and they won’t fall far enough to avoid creating reverberations in the apparel industry, Raines said, impacting profits all along the supply chain.
“The assumption is they’re going to have to pass some of this on at the retail level; the question is how much,” said Nate Herman, vice president of international trade for the American Apparel & Footwear Association. “It won’t be the full amount of the additional costs people are paying in the supply chain.”
Retail prices for apparel are likely to register increases in the low- to midsingle digits next summer or fall given the production schedule of apparel, Herman said. Pushing costs back up the supply chain is trickier now because of a consolidation of the sourcing base following the economic crisis, when many factories were forced to close.
Cotton prices were driven higher this year by a supply-and-demand ratio that is wildly out of whack, experts said. A surprise increase in demand for cotton followed the steep drop-off precipitated by the global economic crisis. Combining that with already high demand from China helped create a cotton shortfall. The supply side outlook was further impacted by inclement weather in some of the major cotton-producing countries such as China and Pakistan and export policies in India limiting cotton exports earlier this year. In addition, high prices of other commodities like corn and soybeans have stolen acreage from cotton in recent years as farmers shifted to other crops.
“The world supply-and-demand situation remains the tightest in the modern globalized era,” Cotton Incorporated said in its Monthly Economic Letter for December. “Much of the tightness at the world level can be attributed to China.”
India’s export policies were also under scrutiny this year. The country imposed a ban on raw cotton exports last spring in response to pressure from domestic manufacturers, who said they needed relief from high prices. While the outright ban was lifted several weeks later, India continues to eye its export levels.
“This year every bale counts,” said Jon Devine, an economist with Cotton Inc.
Despite high prices, demand for cotton remains so high that four months into the crop year for 2010-2011 almost 100 percent of the projected U.S. crop is already sold, he said.
World cotton production in 2010-2011 is forecast to be 115.5 million bales, a 14.5 percent increase over the prior year, the U.S. Department of Agriculture said in a December report. The U.S. crop is predicted to be 18.3 million bales.
The USDA predicted that cotton usage worldwide will decline slightly in crop year 2010-2011 as cotton prices continue at “unprecedented levels amid tight supplies.” The drop is predicted to be only 2 percent, signaling it could be some time before a market correction in cotton prices takes hold.
The continued high prices could drive manufacturers to substitute other fibers, Raines said. While shipments of cotton apparel to the U.S. rose in October compared with a year earlier, its share of total textile and apparel imports sank to 38.3 percent, the second-lowest in more than two decades, according to a research note from FCStone.
Wool prices are also elevated more than they have been in years. Some of the price increase could be attributed to a slight rise in demand, but for the most part sources said the prices were driven by a production decline.
Wool production worldwide peaked around 1990, but it has been on the decline since then due to a range of factors, including profitability, and land and labor issues for sheep farmers, said Rita Kourlis Samuelson, wool marketing director for the American Sheep Industry Association, based in Englewood, Colo. Wool prices have fluctuated, but they have been trending up, especially recently, she said.
Worldwide, wool production and demand are roughly the same now following previous overproduction that had driven prices down. That ratio has evened out, Samuelson said. Depending on the indicator used, prices in October were close to a 10-year high, she said.
Synthetic prices are also up, a natural function of higher demand for the product driven by staggeringly high cotton prices and elevated oil prices, Raines said. But prices for polyester and other synthetics have not seen the steep increases that natural fibers have.
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