Anyone who has balked at hefty prices on simple cotton apparel of late, or has noticed that the percentage of cotton in blends has been declining, can blame it on record high prices for the raw commodity for the past two years. But after an era of escalating prices, things appear to be turning around — at least, temporarily.
The cost of cotton has plummeted to its lowest point in nearly two years. The reason for the decline can be mainly attributed to two events: There's a reduced demand in China (which typically imports cotton in large amounts), and an increase in stockpiles of the material, which come as a result of growers who rushed to produce more when prices were at their peak.
So, if the cost of cotton has gone down, this means the price of cotton goods — namely clothing — will drop as well, right? Not exactly.
Decreased Costs Don't Always Translate to Stores
Unfortunately, it's very unlikely that consumers will be the ones to benefit most from the change. When cotton tumbled to a 21-month low this month, it was retailers that benefited. Companies like the Gap and Abercrombie & Fitch reported higher profit margins and lower manufacturing costs, thanks to cotton's lower cost.
Retailers plan assortment and order inventory six months to one year ahead of time. That's why we see fall fashion shows in the spring, and spring fashion the prior fall. Cotton prices will have a big effect on how much retailers spend on the product they order, but few will pass those savings on to shoppers. At least, not yet.
That's because, despite the formerly high cotton prices, apparel retailers had been "holding the line" on apparel costs. Some increases were passed along to shoppers, but they were incremental and not enough to break even with the rise in overhead. This is in contrast, for example, to price hikes in the food industry, which automatically get passed on to consumers. The supermarket shelf price of milk, eggs, produce, and, most recently, peanut butter (due to a bad peanut crop causing shortages) all go up when the price of the commodity does. Supermarkets run on razor thin profit margins, close to 2% in many cases, and can't absorb higher costs for any length of time.
A Dip in Prices Might Only Provide Temporary Relief
Cotton prices have come down due to a combination of two things. First, growers produced an excess of inventory. Second, demand went down. China reduced its cotton imports, a very big deal in a global economy, and manufacturers found ways to reduce the amount of cotton they used. For example, denim has more Lycra and spandex, cotton shirts are tissue paper thin, and there's more made from synthetic materials like rayon to satisfy apparel needs. Other natural fibers are becoming more common too; shoppers looking for summer beachwear are just as likely to find beach cover-ups and sun dresses made from silk as cotton.
If cotton prices hold steady, then they shouldn't rise again for a good while. But that's a big if. Some analysts expect the demand to rise again as prices become more attractive, while the new crop could simultaneously produce less of the commodity than the surplus we currently face. Prices are set as investors bet on futures, or rather, on what will be produced rather than what has been produced.
But it's not all mediocre news for the budget-minded shopper. Even though retailers are benefiting from lower cotton costs, and happily reporting those profits to Wall Street, we may see stores more keen on discounting cotton basics for promotional events. There's also the possibility that the fashion industry, always a year ahead of what reaches stores, may make more liberal use of the material. Fingers crossed that someday soon, we'll be able to purchase a T-shirt that isn't see-through.