Cotton prices, which surged to historic highs this spring, have plunged 38% so far this month, roiling mill owners and apparel makers.
It's a reversal for clothing makers that spent the last year grappling with higher costs and how much, if any, could be passed along to consumers. Now, retailers are wondering if lower cotton prices, off 53% since their March 4 peak, will last or if the roller-coaster ride will continue.
"There's never been this kind of volatility in cotton-ever," Eric Wiseman, chief executive of VF Corp., the world's largest apparel company, said in an interview on Thursday.
Lower cotton prices won't show up in merchandise on store shelves until late spring of next year. But over the next few months, clothing companies will have to decide whether they can continue to charge more for their T-shirts and denim jeans, allowing them to widen profit margins, or to pull back and give consumers a break.
VF, maker of Lee and Wrangler jeans, hopes price hikes will stick. "In an ideal world, we'll be able to hold the current prices and recoup the gross margin we've lost," Mr. Wiseman said.
The swing in cotton prices has been particularly evident over the past year. Propelled by bad harvests in Asia and robust demand, cotton more than doubled between last July and March's $2.1515 a pound peak price, the highest in the 140 years that the commodity has traded on an exchange. But cotton prices have retraced their gains, falling by more than half since early March. Prices for December delivery closed at 98.63 cents a pound on Thursday on the Intercontinental Exchange.
The surge late last year forced companies to decide among raising prices, taking a hit on margins or re-engineering their products to use lower-cost fabrics or less embellishment, said Christian Callieri, a principal in A.T. Kearney's consumer and retail practice.
Brands that specialize in value-priced merchandise such as T-shirts and jeans are most vulnerable to price volatility because raw material costs make up a greater percentage of their total cost.
The pressure is particularly acute for underwear makers, including Hanesbrands Inc., Fruit of the Loom Inc. and Jockey International Inc. Fabric can account for as much as 60% of the cost of a garment.
Hanesbrands has raised prices already this year and plans to do so again in the fourth quarter. Chief Executive Rich Noll said the company is in talks with its retailers on how to handle pricing for the second half of 2012. One option would be to increase the number of items in a package-adding a pair of underwear, for example-while keeping the higher price. "In essence, you have offset the fact that cotton has come down," Mr. Noll said.
Many foreign mills that had purchased cotton during the price run-up are now rushing to cancel the contracts, figuring they can no longer afford the prices now that there is less demand, according to cotton merchants.
China, the world's largest cotton consumer, reported a 32% year-on-year drop in its cotton imports in June, confirming market fears over weak demand. In its latest monthly report, the Department of Agriculture cut its estimate of U.S. cotton exports by 8% to 12 million bales for the marketing year ending July 31, 2012. For the year ended July 31, U.S. exports are estimated to reach 14.5 million bales.
Spinning mills, which turn raw-cotton into yarn, are caught in a dilemma. As yarn prices fall steeper than cotton, many mills would rather buy yarn directly to deliver to textile plants, said T. Jordan Lea, chairman of Eastern Trading Company, a Greenville, SC.-based cotton merchant.
As a result, merchants are seeing waves of cancellations and even defaults from cotton buyers in countries like Indonesia and Bangladesh, who can't afford the pre-fixed prices or simply don't need the cotton any more. "It's extremely challenging," Mr. Lea said.
Japanese mill Kurabo Industries is not canceling contracts, said Ippei Sasaki, a mill representative. But the company is suffering from the volatility. "We are seeing smaller profits," he said. Since it buys raw material three months in advance, it still has cotton in inventories at $2 a pound, but has not raised prices too much because it is competing with lower-priced fabrics from China.
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