Cotton Markets

by Elaine Schwartz    •    Feb 23, 2011    •    713 Views

On November 10, 2009, the price of 1 pound of cotton was 59.2 cents. A year later it was $1.02 and now, it is close to $1.90.

For many of us, the result will be more expensive jeans, more polyester, and smaller buttons. 7 For all Mankind and North Face said prices would probably be higher next year. The Jones Group CEO, owner of Anne Klein and Nine West, said that an $80 jacket could experience a $15 price increase.

We also might see more organic cotton products. In the Alabama town that used to be called “The Official Sock Capital of the World,” one factory switched to organic cotton. Make a more upscale product and people might accept the price increase. Others just had to close because they could not compete.

You can see how the impact of more expensive cotton will ripple from cotton fields to fabric factories, to designers, to synthetics, to retailers and to Congress because opposition to cotton subsidies has intensified. Even Ben Bernanke might have something to say.

The Economic Lesson

The cotton story is classic Econ 101 1/2.

On the supply side, events have shifted the supply curve to the left. We started with less supply because of depleted inventories during the recession. Then, bad weather in cotton producing nations like Pakistan, hoarding in China, and export restrictions in India have further diminished supply. In addition, when biofuel commodities started to rise in price, some farmers shifted acreage away from cotton.

The result? Because the upward sloping supply curve shifts to the left, price rises.

But then, suppliers try to cut costs and high prices attract more cotton growers. Lululemon Athletica, for example, has moved factories from China to Vietnam and Cambodia because of cheaper labor. Demand for cotton diminishes as suppliers try new fabric combinations. Quantity demanded for cotton will rise when supply increases. Ultimately, the market could take care of the problem.



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