Retailers to be hit by rising cotton costs

Retailers are facing an unprecedented rise in cotton prices and higher manufacturing costs out of China, forcing some to lift prices or risk selling their goods at a loss.

Cotton prices have more than doubled in the past 12 months, hitting new highs in recent weeks after flooding wiped out crops in Australia and Pakistan, and demand surged in China.

Cotton futures are trading above $2 a pound while the March contract price has increased by 40% in a month. The price of synthetic fabrics has also jumped due to increased demand for alternatives and blends.

The appreciation of the Australian dollar to parity with its US counterpart has helped insulate retailers to some extent, but businesses are now warning the price of cotton-based products such as bed linen and T-shirts is going to rise as they seek to recover costs.

RedBubble, an online community which displays the work of local artists including T-shirt designers, says the forecast for the year ahead is grim.

“At the moment, our businesses haven’t passed the cost on to the consumer, but my gut tells me the situation will worsen,” company spokesman Ed Redman says.

Australian retail group Specialty Fashion, which houses clothing brands such as Millers and Katies, says soaring cotton prices are a major concern for the sector, and consumers should expect to pay more as a result.

The scarcity of cotton has been highlighted by the Australian Bureau of Agricultural and Resource Economics and Sciences. The bureau estimates about 7% of total Australian cotton plantings in 2010 to 2011 – valued at around $150 million – have been destroyed by floods.

However, a recent ANZ report has detailed a number of positive medium-term considerations as a result of the floods, namely the improvement of sub-soil moisture levels.

“This is positive for the new few years [of] farming activity. In the near-term, agricultural yields will be reduced in some sectors, but the medium-term outlook for cotton… is actually improved,” the report says.

Even though Australia is the major producer of cotton in the southern hemisphere, it exports nearly all of its annual cotton production to the world market since it has no significant textile production industry.

For the past 15 years, China has made up the bulk of the world’s manufacturing industry. Although China’s manufacturing processes are efficient, they are now more expensive than ever before amidst rising factory wages.

This has led some companies to seek out other options, with India, Bangladesh, Cambodia and Vietnam fast becoming viable manufacturing alternatives.

However, it’s been argued that India and Bangladesh have problems with lead times and quality, which could add to retailers’ woes.