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The Cotton Crunch Impressions January11 .pdf

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How unique
have aligned to
help bring a spike
in cotton prices
that will affect
everything made of
our favorite fiber.
By Christopher Bernat and
Jackson Burnett, Contributing


Impressions >> January 2011

The Cotton Crunch
Editor’s Note: The authors’ intention in writing this article is to offer a snapshot of many
of the factors affecting cotton prices as of
press time in Nov. 2010. A definitive forecast
for what will happen in 2011 is difficult to
assess because of the rapidly changing economic and societal climate.


e all know and love cotton.
The fabric of our lives is a part
of virtually every human being’s wardrobe. Basically, cotton has been
around forever — it was first cultivated
more than 7,000 years ago.
For nearly as long, people have been
building economic systems around cotton. These economic systems, designed to
extract profit from cotton, have changed
over time.
For example, at the height of British colonialism in India, England created
a massive industrial revolution, in part,
around Indian cotton. Through a system
of tariffs and fees, the British enacted a
cotton-based economic engine that built
enormous wealth and political stability in
England for decades. Through transportation, navigation, mills and sewing houses,
the final product was sent back to India
and the rest of the world to sell.
Over time this model showed itself to
be non-competitive. New models were
built to better serve the market.
Today is no different. While the rules
of cotton pricing and distribution have
changed, the desire to extract profit
from it has not. The countries involved
have changed slightly but demand and

buying power also have changed, becoming more intense.
The biggest change may be the “new”
factors that are affecting how cotton prices are determined. Commodity investing,
tight global supplies and the need to maintain cotton for local manufacturing all affect price.

As of press time, cotton prices have risen
56% in the past 90 days and 101% year
to date, according to The Wall Street Journal. And Business Recorder reported that
Pakistan, the fourth-largest producer of
cotton, had more than 30% of its cotton
crop destroyed by floods. This disaster will
impact its productivity for several years to
come. Thus, Pakistan is being forced to import 3 million bales of cotton to contend
with local manufacturing demand. Bad
crops from Southeast Asia to western Arizona have combined to increase concerns
about supply.
These are only the headlines of the story. There are several other long-term factors combining to create real pressure on
cotton prices to cause the most dramatic
cost increase since Reconstruction. Cotton
consumption is at 1997 levels — the highest on record — and cotton supply has
been flat since 2005. As of Nov. 1, 2010,
85% of the U.S. cotton crop had been sold
when typically only 30% is spoken for by
that date each year (author’s research).
China’s demand for cotton is insatiable
and that demand, in part, is export driven.
The country now is the leading producer

Many global factors
are affecting the recent rise in
cotton prices. Now more than
ever, it is imperative to educate
yourself and your customer as to
why our industry’s favorite decorating canvas is costing more.

of cotton and has the largest manufacturing
base dedicated to it. China has a fast-growing middle class that is increasing demand
for the product as well. And for much of
2010, India implemented a ban on raw cotton exports because of cotton shortages in
its own textile mills due to Chinese demand.

The world ­— and the U.S. consumer specifically — have enjoyed nearly 20 years of
low-cost cotton. Americans have seen the
cost of their clothes stay below the average rate of inflation since the early 1990s.
During this period much of the production moved to China and other low-cost
manufacturing countries. These countries
kept the value of their currency artificially
low, which further reduced inflation on
these cotton products.
This lack of price increases during the
past 20 years will only make consumers
more aware of the increases they will see
starting in the first quarter of 2011.
Price increases have been announced
by many major T-shirt manufacturers.
Most distributors of these brands started
passing through these increases in September 2010. It may be just the beginning

if cotton prices continue to rise.
Another factor is that labor is becoming more expensive and more particular
in the work manufacturers take on. Many
Chinese mills are shying away from traditional T-shirt production. They want to
use the cotton for more intricate apparel
manufacturing, which causes more production time and higher margins. This, in
turn, is increasing the costs the broker is
willing to pay to get things done on time
for their customers.

Most of the world’s commodities are
traded in U.S. dollars. Oil, sugar, cotton —
even frozen concentrated orange juice —
are traded in greenbacks.
But there’s a problem. The dollar has
lost some of its value over the past decade.
While we constantly hear that America
wants a strong dollar, we are faced with
the fact that it has lost value against the
Yen, Euro, Australian dollar and Colombian Peso.
This directly impacts the price that people in these other countries are willing to
pay. Many of them will pay more because
the impact is absorbed by the change in the

currency values at the commodity level.
The second part of the commodities
connection is the changing world of investing. Twenty years ago, very few individual
investors bought commodities. They focused much of their attention on stocks,
bonds, real estate and other tangible properties. The increased focus on commodities
prices as a way to make money has caused
speculators to enter this market.
We all saw how this affected oil and
gas prices prior to the economic crash in
2008. People invested in the commodity
rather than stocks and caused the price
to rise. The chance that they will quickly
turn away from oil, cotton or copper always is present. If they sense that the price
is going to crash, they will most likely try
to “cash out.”

This is a real concern for the people growing and harvesting cotton. They also are
worried that cost will cause brands to
consider other materials. Major retailers
have said higher cotton prices will result
in price increases for the consumer.
Retailers must make quick decisions on
whether they will support such increases.
January 2011 << Impressions



US Apparel CPI




Apparel CPI:

Nearing Completion



WTO Quota

Prices up in


NAFTA, Quota Eliminations and Globalization drove an
unprecedented period of apparel deflation. These one-time events are now
over. Apparel returns to historic relationship mirroring CPI increases.


• Cotton is a soft, fluffy
fiber that grows in a boll
around the seeds of the
plant. It is a shrub native
to tropical and subtropical regions around the
world, including the
Americas, Africa, India
and Pakistan.
• The botanical purpose of
cotton fiber is to aid in
seed dispersal.
• Cotton was first cultivated 7,000 years ago
by Indus Valley civilization, which covered what
is today parts of eastern
Pakistan and northwestern India.
They will try to pass it on to the consumer but may have to “eat” the increases if
the market will not pay the higher price.
Many retailers are going back to the mills




Consumer Price Index

Impressions >> January 2011

and finding the cotton they were going to
buy has been sold to someone else. This
could trickle down to all levels of the Tshirt economy. Supply will be less plentiful than in the past, which also will determine pricing.
One result of this is that garments
made with synthetics such as polyester,
nylon and viscose may become more price
competitive. That does not mean prices
for performance apparel will stay level.
Mills could switch to synthetics to avoid
shutting down due to the scarcity of cotton fiber, undoubtedly pushing the price
up, but not to the degree of cotton.
Historically, synthetic garments have
been two to three times more expensive
than comparable cotton garments. This
spread will be cut dramatically if the current trends continue, giving the consumer
an interesting decision of paying only an
incrementally higher price for a valueadded product.
The performance apparel trend, which
has surged in the past five to 10 years,
stands to be a winner from these price issues. Many would-be consumers have resisted buying this product due to its higher price points. Not only will the price be
more attractive; you may not be able to
find cotton T-shirts in the colors you want
at the time you need them and can look
to synthetic garments as a second choice.
Performance fabrics made with recycled components also may become more
price competitive vs. cotton. These prices
will remain static, as the fiber supply is not
affected by increased raw materials prices.
These could become a good alternative for
green companies marketing organic cot-

ton, which will see price increases along
with the broad cotton market.

No one knows how this game will finish. Prices ebb and flow over time. What
is clear, however, is that the days of lowcost cotton T-shirts are about to go away
for a significant period of time. The lack
of inflation in cotton garments during the
past five years was a “once-in-a-lifetime”
situation driven by many forces of both
economic and societal natures.
Smart decorators will recognize this
trend now and begin to educate their
customers to prevent sticker shock in the
near future. Business is not for the faint
of heart. Prepare for major shifts in pricing now. You can always be pleasantly surprised at a later time.
Jackson Burnett is president of Vapor Apparel and previously managed digital cotton products at Sawgrass Technologies and
was Export Sales Manager for Unifi Inc.
He holds a textile management degree from
Clemson University. Christopher Bernat is
chief revenue officer at Vapor Apparel and
currently is on the Board of Directors at
SGIA. Previously he was director of sales
at Sawgrass Technologies. For more information or to comment on this article, e-mail
the authors at chris@vaporapparel.com or

Hear Chris speak on a variety of apparel decorating topics at the 2011 ISS
shows. Individual seminars are just
$25 if you pre-register: issshows.com.

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