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How Rising Food Prices Could Jeopardize Apparel Rebound: Week Ahead

Apparel and retail companies who want to get a read on consumer spending might want to start paying attention to what appears to be the start of a megadrought in the U.S.

California Gov. Gavin Newsom on Wednesday declared a drought emergency in two of the state’s northern counties, Sonoma and Mendocino. That move followed pressure for him to declare a statewide drought emergency. But the water issues extend far beyond just California. In fact, climate change is believed to be having an impact on the nation’s major water supplies, caused by emissions of greenhouse gases primarily through the burning of fossil fuels.

According to NASA’s Earth Observatory, a report last month indicated that almost half of the U.S. is experiencing some level of drought, and “it is expected to worsen in upcoming months.” The bulk of the dry conditions are in the West and, in particular, the Southwest.

Two of the nation’s largest reservoirs, Lake Mead and Lake Powell, supply water to three states, California, Arizona and Nevada. This year, the two reservoirs could see water levels drop to a point where the water supply could get cut. That would impact farmers and the agricultural industry. Other states that are getting swept into possible drought conditions include Michigan, Utah, Colorado, New Mexico and Texas.

The California Department of Food and Agriculture published a report in late 2020 that detailed the 2019 crop year. It noted that over one-third of the country’s vegetables and two-thirds of the fruits and nuts are grown in the state. While cattle, calves and dairy are the top agricultural products in Arizona, the state’s top crops include cotton, lettuce and hay. It also ranks high for citrus, melons and lemon production. Livestock production is the focus in Nevada, but it also is a producer of potatoes, barley, wheat and corn, among other crops. And water is needed to grow the crops, not to mention the hay and grains needed for livestock production.

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So, how does this impact apparel?

Obviously, a water shortage affects cotton crops, a staple used in fashion and other soft textiles. But another factor to consider is rising food prices. There’s already been a spike in costs as companies pass along increases due to personal protection equipment needed to protect workers from Covid-19 infections and massive increases to the cost of shipping goods. In addition to food supply chain issues, failed crops or other scarcity in all likelihood will cause prices to rise even higher, a general function of supply and demand. And that spike will leave consumers with a bit less in their pockets for discretionary spending, such as for apparel.

The National Retail Federation, an industry trade group, in February forecast annual retail sales to grow between 6.5 percent and 8.2 percent in 2021. Much of that growth is expected to come in the second half of the year, pinned to a vaccine rollout that fuels a stronger economy as a return to normalcy gives way to more job creation.

And earlier this month, data from the Census Bureau indicated that U.S. retail sales in March soared to a seasonally adjusted 9.8 percent, or $619.1 billion, from February.

Walter Loeb, a former retail analyst and now consultant, said much of that growth was from pent-up demand. He believes concerns over drought conditions could play a key role in future consumer spending.

“I think this could have a very serious effect on the economy,” Loeb said. “We are so dependent on getting much of what we need from the West Coast, both for food and everything else.”

And if food prices go higher and higher, worrying about having enough money to eat could become more important than shopping for new threads.

“Much of the spending in March was temporary because of the Covid relief package. I don’t see anything else coming down the pike in the form of another package right now. Many consumers are stuck, and they don’t have the [financial] ability to buy more,” Loeb said.