Unit 1 Micro: Cotton Prices and the Retail Price of Clothing

How does the world price of raw cotton affect the cost of buying new clothing on the high street and in the supermarkets? The answer is that the price of natural fibres is a key raw material into manufacturing garments and home furnishings. If prices rise, this increases the costs of production causing an inward shift of supply for clothing and furnishings at a given market price.

The world price of cotton has been rising steeply in recent times. As our chart below shows, raw cotton prices are well down from their peak in the spring of 2011, but the index is still more than twice the level of two years ago.

One of the key reasons for higher prices has been that demand for clothes from people in emerging fast-growing developing countries such as China, India and Brazil has been increasing rapidly. Between 2010 and 2025, it is forecast that world demand for raw cotton will rise by 20 million tonnes per year. Demand for cotton has increased faster than supply can respond and available supplies have also been hit by floods in countries such as Pakistan and Australia and bad growing weather in the United States which supplies about 40 per cent of the world’s trade in cotton.

Put the two forces of demand and supply together - cotton consumption worldwide is now exceeding production and prices go up as a result.

For clothes manufacturers and retailers, a crucial decision is whether to pass on the higher costs to their consumers in the form of higher prices.

For many years, prices of many mainstream high street fashion products have been falling and consumers may have become accustomed to this long period of price deflation. If their demand for new garments has a high price elasticity of demand, retailers may have to absorb increased costs and accept lower profit margins.

They might also try to increase efficiency and cut costs in other areas of their business or use their buying power in the garment industry by squeezing more value out of their suppliers.

Some of the biggest fashion retailers are experimenting with different fabric mixes moving away from 100% cotton products and increasing their use of man-made fibres. Others are shifting their clothing production away from countries such as China and Indonesia in favour of lower wage manufacturing in Bangladesh and southern India.

Is the era of ultra-cheap clothing for British consumers well and truly over? Possibly so and if his happens, cotton prices are only part of the explanation. Other costs have also increased including a surge in wages in many centres of manufacturing in the Far East, the effects of higher VAT and retail rent levels. But intensive competition at retail level means that the retailers themselves will shoulder much of the increase in their cost base.