As U.S. spot cotton prices averaged $1.23 per pound for the week ended Feb. 10–the highest since July 7, 2011, when the average was $1.26, according to the U.S. Department of Agriculture (USDA)–this surge in prices has left many wondering “how high can they go?”
It’s been exactly 11 years since cotton prices topped $2 a pound in February 2011 in the wake of the Great Recession, as demand outstripped supply. While few market observers today feel prices will venture that high, an air of uncertainty lingers.
“Unless there’s a shooting war with Russia or more trouble on the trade front or who knows what, the fundamentals are for moderate cotton prices,” said cotton industry veteran Robert Antoshak, now a consultant for Louisiana denim manufacturer Vidalia Mills.
The uncertainty revolves around when prices could peak, with the upward trend continuing last week as the USDA weekly average for spot cotton prices rose from $1.18 the prior week and from 77.4 cents a year earlier.
The Nearby March New York ICE futures contract increased to $1.27 per pound from $1.15 in the last month, with current prices for May futures around $1.24. According to Cotton Incorporated’s monthly report for February, values for the December 2022 New York ICE contract, which reflect price expectations after the 2022-23 crop year, rose to $1.06 from 94 cents.
The A Index, an average of global spot prices, increased to $1.41 from $1.29 in the last month. Cotton Inc. said those values are also the highest since 2011.
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“It could be a bumpy ride for the next couple of months, but more supply should be headed to the market,” Cotton Inc. chief economist Jon Devine told Sourcing Journal. “Higher downstream prices, the withdrawal of stimulus and rising interest rates could be expected to challenge demand and price momentum in coming months. Any easing in the shipping crisis could also help ease prices.”
The raw material surge for apparel and home goods also includes synthetic fiber prices, with the two materials still accounting for the vast majority of market share despite the introduction of many alternative next-generation materials in recent years.
While generally not as volatile as cotton, which is a traded commodity subject to speculative trading, synthetic fiber and fabric prices usually swing in the same direction as cotton, especially during supply and demand extremes as opposed to weather-related problems.
The U.S. Bureau of Labor Statistics Producer Price Index for synthetic fibers was up a seasonally adjusted 0.1 percent in January and was 17.7 percent higher than a year earlier. Prices for U.S.-made processed yarns and threads rose 2.1 percent last month and have jumped 29.3 percent from January 2021, while finished fabric prices increased 1.3 percent for the month and 14.6 percent for the year.
Hit by overall inflation and higher raw material costs in the sector, retail apparel prices increased a seasonally adjusted 1.1 percent in January from the prior month and were up an unadjusted 5.3 percent compared to a year earlier, the U.S. Bureau of Labor Statistics (BLS) reported in its Consumer Price Index (CPI).
“We’ve revised up the forecast for CPI inflation in 2022 from to 4.2 percent to 4.5 percent,” Joel Prakken, chief U.S. economist at IHS Markit, said. “However, we expect core inflation rates to subside close to the Fed’s long-run 2 percent objective by 2023, with the partial reversal of pandemic-era increases in the prices of goods.”
Some companies expect to successfully navigate the turmoil in raw material prices.
Chip Bergh, president and CEO of Levi Strauss & Co. told analysts “our strong brand equity is driving pricing power.”
“We have plans to take additional price increases in 2022 and beyond, helping us to offset inflationary pressures,” Bergh said. “Even as we take price [increases], our products provide an exceptional value to consumers.”
Bergh said Levi’s fabric mix is about 15 percent to 20 percent cotton.
“Cotton continues to be high, but because we are effectively priced for it, we think our gross margins will be able to offset that even as we think about the first half of 2023,” he added.
Unifi Inc., which produces recycled and traditional polyester and nylon fiber and yarn, has also had to raise prices.
“With the inflation that we’ve seen in other areas of the business, we’ve had to institute additional price increases at the beginning of January,” Unifi CEO Eddie Ingle said. “This was driven primarily by labor and other durable materials in the polyester and nylon segments.”
Antoshak said if cotton prices keep going up, brands could increase their adoption of blended fabrics, especially in denim.
“I remember talking to a lot of brands when that happened and a lot were caught off guard,” Antoshak said. “It took them a while to figure out they could use blends, particularly with polyester, to moderate their prices. Now that they already have that experience and some have it built in, they will be quicker to use more blends to average the price.”
Devine’s “Monthly Economic Letter” said the upward trend in cotton prices has continued despite persistent estimates indicating that global cotton stocks are higher than before the pandemic. In 2017-18 and 2018-19, global cotton stocks were 81.2 million and 80.1 million bales. Average prices for the A Index during those two crop years were 88 cents per pound.
Ending stocks in 2021-22 are forecast to be 84.3 million bales and current values for the A Index are $1.40 per pound.
“The unprecedented volume of stimulus that followed Covid and the shipping crisis are all distortions that can explain some of the deviation in the historical relationship between stocks and prices,” he said. “Given the size of the discrepancy, some attention should be paid to where global cotton stocks are located.”
China is the world’s largest warehouser and is expected to hold 43 percent of global stocks at the end of 2020-21. USDA figures show that Brazil should hold the second-largest volume of stocks at the end of the crop year. However, that is due to the timing of the Brazilian harvest relative to the end of the international crop year and is not a reflection of surplus fiber available to the market.
India is the next largest location for stocks. According to Devine, there have been reports that Indian growers have been withholding seed cotton from gins speculatively, with hopes of taking further advantage of the upward trend in prices.
“Delays in the flow of cotton in India and China may be contributing to feelings of scarcity,” Devine wrote. “China and India are the world’s largest spinners. Imports can be substituted for domestic supplies to feed mills. However, the shipping crisis is an impediment facing shippers around the world.”
Meanwhile, U.S. export shipments are down 43 percent year-over-year crop-year-to-date. With challenges in securing trucks and ships, it remains to be seen if the U.S. will meet the lowered forecast for exports this crop year.
“High prices suggest an increase in acreage and production around the world in 2022-23,” the report said. “There is more uncertainty on the demand side. Stimulus is scheduled to be withdrawn in several major consumer markets. At the same time, general inflation and price increases for apparel and other finished textiles threaten downstream demand.”
Antoshak said Vidalia Mills’ denim is a premium product, “so we’re a little less price sensitive than others.”
“We also have a pretty good cotton position, so that’s been helpful,” he said. “We’re also vertical–we make the yarn, too–and a lot of the leading mills may not be, and yarn prices have been up a lot, too.”
Antoshak believes increased cotton production will support stabilizing prices.
“If more farmers are inclined to go after those higher cotton prices, it can create a loop that brings down prices over time,” he added.