Cotton prices haven’t been this high since July 2011.
They surged to a 10-year high on Friday, reaching $1.16 per pound. The price of the commodity rose roughly 6% last week, and is up 47% year to date.Analysts have noted that gains are being intensified further from traders rushing to cover their short positions.
There are a number of factors behind the surge. Last December, the Trump administration blocked companies in the United States from importing cotton and other cotton products that originated in China’s Western Xinjiang region over concerns it was being produced using forced labor by the Uyghur ethnic group. The ruling, which remains in place, has forced Chinese companies to buy cotton from the U.S., manufacture goods with that cotton in China, and then sell it back to U.S. consumers.
Nevertheless, extreme weather conditions this year have wiped out cotton crops across the U.S., which is the biggest exporter of the commodity in the world. In India, meanwhile, deficient monsoon rains threaten to hurt the country’s cotton output.
The dynamic has already put pressure on shares of companies like HanesBrands, an apparel manufacturer known for its undergarments and cotton T-shirts. Historically, HanesBrands shares fall as cotton prices rise. The stock tumbled 7% over the past week. On Friday alone, shares shed 5% to close at $16.23.
Another major name in clothing, Levi, has already attempted to allay fears about its denim business.
In its most recent earnings call, Levi said it has already negotiated most of its product costs through the first half of next year, at very low-single-digit inflation. For the second half of the year, it expects to see a mid-single-digit increase.
Levi has been shifting its business from predominantly wholesale to a mixed base that has a growing share of direct-to-consumer sales. And with strong consumer demand and tightened inventories, it’s been able to sell more products at full price.
Cotton accounts for about 20% of the cost to make a pair of Levi’s jeans, Chief Financial Officer Harmit Singh said on the call, with every pair of jeans containing about two pounds of cotton.
Due to the timing of its earnings call, Levi was one of the first apparel retailers to comment publicly on the surging cotton prices. Others will report fiscal third-quarter results in the coming weeks.
According to analysts at Goldman Sachs, however, it will take a while before the rising cotton costs even begin to show up on retailers’ income statements given the timing of contracted cotton purchases. And it’s worth noting that in 2011, cotton prices spiked to more than $2 per pound, which is well above where the commodity is trading today.
This said, apparel stocks may face some pressure as the higher prices persist. Analysts have flagged a range of big names from Ralph Lauren and Gap Inc. to Kontoor Brands, which owns Wrangler and Lee Jeans, and Calvin Klein-owner PVH. Shares of Kontoor fell by nearly 6% this past week, while PVH, Gap and Ralph Lauren each ended the week down less than 2%.