Costs affecting the fabric of our lives

There have been a few signs that the economy has been improving. Retail sales have been increasing. In fact, they have been increasing for the past seven consecutive months. I shouldn’t have to tell you that this is a good thing.

Of course, not everything is getting better.

“Chris Christopher, an economist at IHS Global Insight, said consumer spending will likely continue to increase over the next few months. But he predicts it will happen more slowly than at the end of last year, even with workers taking home more pay from the tax cut.

“Winter storms, a poor housing market, rising gasoline and food prices, and lackluster employment growth … put a damper on things,” Christopher said.” (source)

However, there is more not discussed in that article.

Commodities have been rising, and the one I want to focus on right now is cotton.

As can be clearly seen, cotton prices have doubled since September 2010. Some of the reasons include:

  • increases in demand in China
  • poor weather in India have affected crops
  • flooding in Pakistan and Australia

Many textile and apparel companies are going to be left with a few options:

  • face decreased profit margins
  • increase prices to consumers

This inevitably will have effects on consumer spending habits. Companies with a target market that is more sensitive to price changes have the high possibility of losing market share to lower cost competitors.

However, many do not believe that cotton prices will continue to rise in the same manner that is has been doing in the last 6 months (barring any unexpected political and/or natural disasters). With the surge in prices also comes as increased rush by farmers to produce more cotton. Just in the US cotton planting is expected to surge 14% in 2011. The outcomes of the cotton US subsidy problem will also have an effect on prices.

In the short term we should expect higher volatility for textile and apparel companies as they make their decisions on how to handle the increased costs. Companies such as Lululemon, which have higher priced products to begin with, may be able to get away with increasing costs, but most other companies don’t have that luxury.

One thing also to consider is alternative products to cotton. More companies could turn to alternative materials such as polyester. This is good news for polyester producers such as Celanese Corp.

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