Cotton Cools Down
October 20, 2011,
Cotton prices were delightfully low through the early half of 2009, running somewhere between 49 to 52 cents per pound, depending upon the grade.
That was great for cotton consumers, but not for cotton farmers, many of whom decided to spurn cotton in favor of corn and soybeans, which were commanding far better prices, according to Cotton Inc. economist Jon Devine. Once cotton prices took off, farmers pivoted again, resulting in what the US Department of Agriculture expects to be a bumper global cotton harvest this fall.
"Last year was certainly extreme," Devine said. "I think this year will be more [stable], but there will be a little bouncing around."
Loftex USA's Gretchen Dale, chief operating officer, noted pricing on finer yarns remains high. "You have cotton like Pima, Egyptian - the high-quality cottons - they haven't moved at all."
Higher priced goods began appearing at retail last spring, but the real hikes (and specification adjustments) began flowing in a few weeks ago with fall merchandise. The industry finds itself grappling with 2012 contract pricing even before the full verdict is in from consumers about the new pricing grid.
Many retailers expect prices to drop.
"Price increases in the first half have been in the midsingle digits and that will continue in the second half," Stein Mart ceo David Stovall Jr. told analysts last month. "We are working with our vendors on that. But we see that pressure lessening as we talk about next spring."
Target evp of merchandising Kathryn Tesija last month predicted higher retail prices will hit their peak during the third quarter and will begin to ease during the fourth. Ross Stores' vice chairman and ceo Michael Bulmuth said he expects the company's prices "will be moderated by next spring."
Williams-Sonoma's Sharon McCollam, evp, director, coo and cfo, said that she "would like to say that the worst is behind us with commodities down. But labor is up in China ... We do have in our margins the worst of it, with the cotton spike from last year. Those goods are in our pipeline as we speak."
TJX ceo Carol Meyrowitz described the recent history in pricing as "crazy," adding: "[Prices] accelerated beyond belief. And now, I think they're something like 50-something percent less than they were when it all started to hike up. So it's going to be very, very interesting."
The next 90 days will be critical in determining what happens with programs in terms of specs and pricing for next year, according to Keith Sorgeloos, president and ceo, Home Source International.
"Retailer pricing will be pretty much locked in through year end as it takes suppliers about 90-120 day lead times to manufacture and run through higher priced cotton inventory," he noted. "If cotton drops below 90 cents per pound on the spot market and below 80 cents per pound in 120-day futures, then it's a good bet that prices will decline as this scenario takes us back to December 2009 pricing. Most of the price increases/de-specs were negotiated between January 1 to July 1 of this year when cotton pricing was running anywhere from $1.25 to $2.00."
Arun Agarwaal, ceo of Alok Industries, said new price discussions have already started - "but only based on when increases were done. There virtually was no business conducted at peak cotton price, which was $2-plus, so that is a very theoretical number."
He added; "Better goods are being quoted (higher thread counts), but spec improvement is not a point of conversations yet."
Fulton Allen, president of 1888 Mills, believes discussions will revolve around what manufacturers offer at different price points.
"Many of the innovations such as light-weight, quick-dry towels which have found a home will stay for some time." He also predicted all-cotton product will regain ground in bath and bedding. "It will be interesting to see if microfiber sheets were a Band-Aid for the consumer or really can compete with a more traditional cotton-rich product a similar price point."
"I saw retailers take price increases very carefully, so I do not think that there will be a big reduction in price at retail as the raw material cost is not back to those extremely low levels," said Frank Snow, vp of merchandising at Royale Linens.
It's also worth noting that while retail prices increased, they did not reflect the full magnitude of higher raw material costs, which were absorbed as much as possible by manufacturers, noted Nelson Chow, vp of sales for C & F Enterprises.
"Many suppliers, including ourselves, absorbed a significant part of the increase and did not pass the entire cotton price increases to the retailers," he said. "Now that cotton prices are cooling off, it does not mean supplier's prices are also decreasing in proportion to the lower cotton prices."
And cotton pricing isn't the only cost that shot up since 2009.
"The issues are more difficult in fashion bedding because most comes from China, where cost has not come down, although factories are not full over there. China has inflation in labor cost and currency issues," said Michael Vidra, president, Next Creations.
And the sizeable cotton global cotton crop that awaits harvest has been plagued by weather issues of various sorts, noted Cotton Inc.'s Devine. West Texas, where wildfires have been raging for weeks, is the largest cotton-producing area of the United States. The wildfires followed a season of uncommonly severe drought for the area. "Cotton can get by with very little [water], but this year they're not getting a drop."
Add to that the impact of heavy rains in Pakistan and India as well as some rain in China, and the supply may turn out to be lighter than originally projected, he said. As this issue of HTT was going to press, the USDA was expected to revise its estimate for the fall cotton harvest, most likely downward.
If nothing else, many agree, the roller-coaster ride of the past 20 months has provided the industry with an education about the volatility of raw material pricing after a decade of steady deflation.
"You can take a poll and ask how many merchants knew the price of cotton three years back, and you will find literally no one," said Alok's Agarwaal. "Now even my housekeeper knows cotton prices are changing."
| Editor in Chief
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