Chinese Cotton on the Rise

Chinese cotton prices are rising due to labor, real estate and demand. The world is spending more money on clothes and Chinese factories are behind in production, again. This movement in the demand curve, coupled with higher prices in production of cotton clothing AND the smallest stockpile of cotton in 15 years will cause the price of clothing at retailers like GAP, J.C. Penney and Wal-Mart to increase.
Chinese suppliers have to see if they can pass the increased cost to U.S. retailers. I don't think that will be too difficult seeing as how cotton suppliers are in a very good position. With demand surpassing supply and cotton stockpiles diminishing, the cotton suppliers should be able to fetch a fair price.


Rhett said...

I thought this article was interesting so I did a little bit of research on the subject myself. Not only is Chinese cotton prices up because of labor, real estate and demand, but the prices have also risen because of poor weather conditions. I found two additional articles that tie in with this post as well. The first one talks about the weather conditions in China and how it has affected cotton. Demand in China is predicted to outproduce supplies by 17 million bales of cotton by July 31 (http://www.bloomberg.com/news/2010-11-24/cotton-rebounds-from-biggest-three-day-slump-since-2008-on-china-outlook.html). This will definitely give the suppliers a great bargaining price.
My other article has to deal with the cotton increases affecting businesses. Retailers are trying to find ways to offset these price increases (http://money.cnn.com/2010/11/24/news/holiday_retail_cotton.fortune/index.htm?section=money_mostpopular). This article talked about a number of different strategies business were taken. Companies have tremendously cut inventory and they are also looking for cheaper products to manufacture their clothes. Retailers are also looking to pass on those price increases to the customers. Sorry long post, but I thought these two articles were a good addition to this first article.

Baden said...

Prices for cotton may increase in the short run, but this will only create an incentive for more cotton to be produced in the future and may even lure more farmers into the cotton market. In the long run prices will come down again as supply increases to meet the quantity demanded. Prices for cotton will decrease even sooner if manufacturers are able to continue to find substitute materials to use in place of cotton.

Grant said...

Substitute materials for clothing production could do a lot to compensate for this lack of supply. I agree that in the short term prices will rise and that these increases could be passed on to the retailers. More interesting is whether this will cause a fundemental shift and a greater portion of cotton production will move to areas with more favorable labor and real estate costs such as India and Africa. It has already happened in the Southern States in the US and both labor and real estate costs in China are expected to continue to grow.

Dave said...

This is representative of a broader problem. The world economy is doing pretty well, and commodities like cotton have been showing demand-pull inflation for most of the last decade.

I do think this is going to lead to more innovation. But, of course, with a commodity like cotton you've got a built-in customer preference that may be hard to overcome.