"Maybe cotton prices were just too low for so long," said INTL/FCStone Fibers & Textiles Senior Risk Management Consultant Andy Ryan. "The U.S. overproduced cotton for many years and was the cheap supplier to the world -- and it only takes a couple of bad crop years and low stock levels to get things going on the upside."
NEW YORK ( TheStreet) -- Cotton prices have nearly doubled over the past 12 months, making it one of the hottest commodities so far this year.
That said, market research firm IBISWorld predicts that cotton farming revenue could grow by more than 80% in 2011. "We don't expect prices to start coming down until 2012, which will help keep industry revenue high," IBISWorld analyst Nikoleta Panteva explained. IBISWorld projects industry revenue to grow at an average annual rate of 2.1%, riding on the wave of increased production and sustained high global prices, over the five years to 2016. In 2010, U.S. cotton exports grew by 70%, with a drastic 151% increase in exports to China, according to the firm.
Harvests, Weather, Competing Crops
China and the Post Recession Period
High Oil Prices
OutlookAs cotton prices continue to rise, consumers may feel the impact at the retail level. But how badly -- and how high could cotton prices rise? Stevens predicts that cotton prices for the current crop year are unlikely to dip below $1.50 a pound -- or even dip to $1.50 -- but could hit $2.50 for the March, May and July contracts of the current crop year ending Jul. 31.
Cotton goes through a fairly complex industrial chain, unlike corn and wheat, which get processed in one or two stages. "It goes through a lot of different hands," said Ryan. "It's a long process." Cotton becomes thread and yarn, which serve as raw materials for textiles; meanwhile fabric and cloth can be traded on another commoditized market. From there, companies cut, finish and sew the textiles then sell it to retailers or suppliers.
"If oil prices go up, gas prices go up pretty quickly, but if cotton prices go up, the price for a pair of jeans or T-shirt should only go up incrementally." Ryan says, for instance, the total price of cotton in a $50 or $200 pair of jeans is just $3 to $5. Meanwhile, if the price of this cotton doubled, the jeans wouldn't suddenly cost $100 or $400. It would just go up by a few dollars. Indeed, Gap ( GPS ) CEO Glenn Murphy says, "what you need to know with us is we're not going to just do the math on this -- which is if our prices were to go up by an 'x' amount, that we're just going to spread that equally into our ticketed price. That, to me, is the way people priced maybe 20 years ago. You've got to be much more thoughtful when you know who your competition is, how you're going to win, what those categories are, that will dictate the pricing choices you're going to make."
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