Home Business Not just gas and oil, but soaring cotton prices. The implications for clothing companies and consumers

Not just gas and oil, but soaring cotton prices. The implications for clothing companies and consumers

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The price hike is not just about oil and gas. The cotton chart also shows a strong surge in recent weeks with around + 20% from mid-September and prices at a 10-year high. Cotton prices peaked at $ 1.16 per pound on Friday bringing the YTD balance to + 47%. The last time cotton prices were this high was July 2011.

The last similar spike in cotton prices dates back to 2011, when cotton prices soared to more than $ 2 per pound, which is well above where they travel today.

This increase was due to a number of factors, including drought and its impact on global production, which together with the surge in demand for post-Covid-19 textiles have contributed to creating an imbalance between supply and demand. Extreme weather conditions, including droughts and heat waves, have also wiped out cotton crops in the United States, which is the largest commodity exporter in the world.

What will expensive cotton mean for companies in the sector and consumers? Big companies should run it without setbacks as cotton manufacturers and retailers have pricing power. Companies will then be able to pass on the higher costs without destroying consumer demand.

On the consumer side, the price of a cotton T-shirt has risen by about $ 1.50 to $ 2 on averagesaid National Retail Federation chief economist Jack Kleinhenz.

Levi Strauss doesn’t care

According to what was reported by the CEO of Levi Strauss, Chip Bergh, the actions taken earlier this year will allow his company to navigate more efficiently. We have traded most of the costs of our products through the first half of 2022 at very low single-digit inflation, ”said Levi Strauss CEO, on the sidelines of last week’s earnings call. “And for the second half (of 2022) we expect an increase of an average figure, which we will compensate with the price actions we have already taken.” In other words, any impact of the increase in prices will be cascaded on final consumers.

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Cotton accounts for about 20% of the San Francisco-based denim jeans manufacturer’s costs. Levi Strauss raised prices across the board by 5% during the second quarter of 2021, resulting in an increase of approximately 1 point in gross margins.

Credit Suisse believes that concerns about retail stocks are excessive due to the increase in cotton prices. One of the stocks most exposed to fluctuations in cotton is HanesBrands, a clothing manufacturer known for its undergarments and cotton t-shirts. The stock has plummeted by 7% in the last week with a drop of 5% in the session on Friday alone. An overreaction considering that only 2% of HanesBrands’ cost of goods sold comes from direct cotton purchases.

Among apparel stocks that could come under some pressure from expensive cotton are companies such as Ralph Lauren, Gap, Kontoor Brands and PVH, owner of Calvin Klein. Shares of Kontoor Brands, which owns Wrangler and Lee jeans, fell nearly 6% last week, while PVH, Gap and Ralph Lauren ended the week with less than 2% falls.

According to analysts at Goldman Sachs, it will take some time for the rise in cotton costs to begin to manifest itself on retailers’ results given the timing of cotton under contract purchases.

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