change in cotton prices quantified in cents/lb produces a
calculated per unit benefit from price decreases. These data
suggest that the decrease in per unit costs could be larger for
heavier goods, like denim jeans.
Calculated sourcing cost savings figures show the
estimated effects due to fiber price changes alone. To provide
additional context regarding the magnitude of the effect of
lower fiber prices, estimated effects are also presented in
percentage terms. The percentage changes were derived
as the relative difference between average import prices in
2013 and the estimated change in sourcing costs based on
average product weights. Results from this analysis indicates
that sourcing costs could decrease by 6% to 7%. In reality,
upward pressure on costs from rising wages and other non-
fiber costs like dyestuffs may partially offset decreases in
sourcing costs made possible by lower cotton prices.
Market forces inside and outside of China that have kept
cotton prices higher in recent years are disappearing. As a
result, cotton prices around the world have moved lower.
The principal drivers of price decreases include Chinese
cotton policy reforms and expectations for large harvests
outside of China. Increases in available cotton stocks should
continue to place downward pressure on cotton prices. With
the transition to lower cotton prices, questions have emerged
regarding how much and when lower fiber prices may
translate into lower sourcing costs for fabrics and garments.
ESTIMATING THE MAGNITUDE OF DECLINE
Estimating the impact of lower cotton prices on sourcing costs
yields useful information for understanding and managing
apparel production costs. Analytical approaches developed
and implemented by Cotton Incorporated to forecast
increases in sourcing costs following the cotton price spike
in 2010/11 can also be used to provide insight about future
sourcing costs decreases. One approach, based on the fact
that cotton garments are primarily composed of cotton fiber,
utilizes garment weights. Publicly available data
1
describing
the count, weight, and value of apparel imports can be used
to produce weight-based estimates of the effect of lower
cotton prices. Multiplying a garment’s average weight by the
Average
Garment
Weight
(lbs/unit)
Sourcing
Cost Savings
(estimate/unit)
and percentage
decline
LOWER COTTON PRICES SHOW POTENTIAL TO REDUCE APPAREL SOURCING COSTS
Multiplying the change in
cotton fiber prices (-30¢) by
the average garment weight
isolates the estimated effect
on sourcing costs.
Product weights are averages for
men’s and women’s imports in 2013.
Raw weights are adjusted for fiber
lost in the manufacturing process
using USDA conversion factors
2
.
Estimated sourcing cost
percentage changes derived
using 2013 average import prices.
Additional estimated
decreases in fiber
costs predicted.
Denim Jeans
or -6%
1.84
.55¢
or -6%
Sweatshirts
1.18
.35¢
or -7%
T-shirts
.47
.14¢
Change in A Index
price from March
2014 to January
2015
-30¢
x
KEY INSIGHTS
• Lowercottonpricescouldleadtolowersourcingcosts.
• Productweightdatamakeitpossibletoestimatedecreasesin
apparelsourcingcostsduetolowerprices.
• Althoughtherealreadyisevidenceoftheeffectoflowerber
pricesonsourcingcosts,thefullimpactmaynotberegistered
untilspring2015.
INSIGHTS
COTTON INCORPORATED
SUPPLY CHAIN
EASING APPAREL SOURCING COST PRESSURES
TIMING OF DOWNSTREAM DECREASES
Cotton Incorporated continually tracks prices
throughout the cotton supply chain in ongoing
pass-through analysis and research that includes
the relative timing of changes in prices at
different textile manufacturing stages. Over the
last ten years, there have been three instances
when cotton prices declined more than 20
cents/lb within a six month period: following
the financial crisis during the fall of 2009, after
the wake of the 2010/11 price spike, and between
the spring and fall of 2014. Average prices for
cotton-dominant imports dropped after each of
these periods when cotton prices decreased
significantly
.
Examination of data about the relationship between fiber
prices and cotton-dominant import prices reveals that the
strongest statistical relationship between fiber prices and
apparel import prices is seven months. Given a seven month
lag between shifts in fiber prices and apparel import prices,
analysis suggests that cotton import shipments arriving in
late spring/summer 2015 should fully incorporate the effects
of recent decreases in fiber prices.
MAINTAINING LOWER COTTON PRICES
Changes in China’s cotton policies have paved the way for
the full decrease in prices that could have been expected
with the massive accumulation of global stocks that followed
the 2010/11 spike in prices. Current estimates suggest that
China holds more than 60% of global warehoused supply
and that Chinese cotton stocks are nearly six times larger
than before the establishment of the government’s price
guarantee policy. Due to reforms in Chinese government
cotton policies, the reserve system will no longer function
as such a dominant force of demand. Going forward, the
world market can view China’s reserve system as a source of
supply since it will no longer be making purchases and could
be expected to sell eventually from its accumulated supplies.
Increases in projected forecasts for the
cotton harvest in other major cotton producing
countries, notably India and the U.S., may
further impact cotton prices. The current
forecast indicate that India’s production will
match its own record of 31.0 million bales
in 2014/15 and that the country will surpass China as the
world’s largest cotton grower–a title that China has held
since the 1980s. Improved rainfall conditions in cotton
growing regions within the U.S., specifically West Texas,
have led to higher production forecasts and expectations
that have helped push NY Futures and A Index cotton prices
lower. Higher production forecasts in exporting countries like
the U.S. and India imply that more cotton supply will be
available to the world market at lower prices.
BENEFITING FROM GLOBAL SURPLUS
World supply and demand conditions should make
the reality of lower cotton prices more likely than higher
prices in coming years. Increased availability of Chinese
cotton stocks, resulting from reforms to the Chinese reserve
program, should hold prices at lower levels. Additionally,
lower prices for corn and soybeans, which can compete
with cotton for farm acreage, suggest a diminished threat
of farmers planting less cotton in future crop years. Even
with stronger than average growth in demand for cotton,
the current global surplus should last for several years.
Stakeholders throughout the cotton supply chain may benefit
from lower prices and the unprecedented amount of supply
available for the production of apparel, home textile, and
non-woven products.
APPAREL IMPORT PRICES SHIFT SEVEN MONTHS
AFTER FIBER PRICE CHANGES
Lagged correlation data utilizes cotton-dominant apparel import prices in seasonally-adjusted terms
expressed in dollars per square meter equivalent (SME)
1,3
.
Data show seven
month lag, on
average, between
changes in fiber
and import prices
About the Research
CottonIncorporatedprovidesongoingintelligenceonthecottonmarketandother
importanteconomicindicatorsthroughthepublicationoftheMonthly Economic
LetterandExecutive Cotton Update.Externaldatasources:U.S.Chamberof
Commerce
1
,USDA
2
,andCotlook(AIndex)
3
.