California Apparel News

In the last year, cotton prices have been on a wild roller-coaster ride, surging to $2.30 per pound in March and then recently dipping back to close to $1 per pound. As a result, apparel manufacturers have been wondering when to buy cotton and how to price their goods to reflect their costs.

Most recently, cotton has been trading at about $1.05 a pound, which is good news because it is about even with last year’s price. But a recent report noted a drought in Texas has left 57 percent of cotton fields in poor or very poor conditions, which could send cotton prices up again. So will cotton prices remain around the $1 mark? How should manufacturers handle this situation?

The California Apparel News recently talked with various factors in the apparel industry and got their advice on how to hedge a volatile cotton market by asking this question:

The recent drop in cotton prices was seen as a welcome sign for apparel manufacturers. But many industry watchers say cotton prices will continue to fluctuate. What are you advising your clients to do to take advantage of the current price and plan ahead for future production?

Sydnee BreuerSenior Vice President of Business DevelopmentRosenthal & Rosenthal

While the recent drop in cotton prices helps, there continues to be pressure from both the consumer and the retailer on margins. Our clients still must maintain their tight inventory levels and not speculate based on what may or may not happen in the future. They also need to set their pricing to the retailer appropriately, based on current costs and circumstances.

That being said, each client has a different set of needs. For example, a larger-size client may be able to lock in these cotton prices and speculate a bit more than a smaller-size client.

However, those who locked in prices six months ago, thinking prices would keep rising, are now regretting it. And our importers should try to renegotiate their cost of the product from the overseas manufacturer based on the reduction in cotton prices—the same way the overseas manufacturers came to them for an increase not too long ago.

Ron GarberExecutive Vice President and Regional ManagerFirst Capital

The feedback I’m getting from my clients is that the fluctuation in cotton prices is not the main driver in determining their pricing decisions both now and in the near term.

Their focus is more on the rate of inflation in China, which is affecting the exchange rate of the Chinese yuan to the U.S. dollar. Real inflation is probably running in the teens while the Chinese yuan to the U.S. dollar is currently trading at 6.4 yuan to one dollar. Earlier in the year, it was at 6.6 yuan to the dollar.

The expectation is by year end it could be closer to 6.2 yuan to the dollar, meaning an increase in the exchange rate to the U.S. dollar of 6 percent since the beginning of 2011. Therefore, the strengthening of the yuan to our currency since earlier this year—and a forecast that this trend might continue through the end of the year—should be the primary concern to manufacturers in their costing analysis.

The impact on U.S. manufacturers of cotton-price fluctuations alone, which can cause a temporary costing conundrum, is dwarfed by the long-term effects on wholesale prices that are linked to a China economy with rising wages, inflation and currency valuation. This will mean only one thing to the U.S. makers: Don’t give back any price increases that you’ve been able to achieve up to this point.

Rob GreenspanOwnerGreenspan Consult Inc.

As always, I believe in being cautious and conservative with inventory purchasing. While commodity prices always fluctuate, sometimes to the extremes like cotton has been doing, inventory levels and speculation remain the biggest challenge for all apparel manufacturers and importers. Taking too big of a risk with purchasing inventory can be disastrous. This can put a company out of business. Having too little inventory will cause you to lose some possible profits, but that is survivable from a financial perspective.

I think all manufacturers and importers should buy to their sales plan or needs. I always advise my clients not to speculate on inventory. Even if the prices are dropping, and one thinks they might rise soon again, to me that is not a good reason to speculate and bring in more product. You need to be diligent on staying the course during price fluctuations. You need to stick to your plan and not get tempted or carried away and take on too much risk. Don’t try to outsmart the economy.

The goal is to survive and be profitable. You need to be able to live for another day. The companies that survive the longest are generally the ones that do best.

Sunnie KimPresident and Chief ExecutiveHana Financial Inc.

Given the volatility in commodity prices in general, it seems prudent to purchase futures contracts in order to lessen the volatility in fluctuating prices. This way, the user is assured of having the supply necessary and the ability to use it as needed.

However, in order to take advantage of such a strategy, the business must have adequate cash or financing available. Unfortunately, in these lean times, many companies are working on less-than-adequate cash reserves. However, those entities in a position to do so will ultimately have an advantage.

Don NunnariFirst Senior Vice PresidentMerchant Factors Corp.

Our advice would be to continue to purchase fabric for orders you have to produce. Our clients are not in a position to speculate on inventory.

Yes, cotton prices have dropped, but the savings have not been passed along to the manufacturer. There might be some good buys at reduced prices, but generally the yarn was purchased at higher prices and the fabric is priced accordingly.

We are hearing from our clients that any price reduction will not be seen until the first quarter of 2012 at the earliest.

Dave RezaSenior Vice PresidentMilberg Factors

We advise our clients to be thoughtful about inventory purchasing and encourage purchases against order positions only so they are not speculating a lot. Given the volatility and the environment of late, many of them are heeding that advice. Of course, when prices start to drop, the tendency is to wait to purchase inventory because the feeling is that prices are going to be cheaper tomorrow. A lot of clients are doing that, [but] I am not saying that is what they should do. Again, if you have orders and the price is right, clients should buy. When prices are going up and down, it does affect buying patterns.

Kevin SullivanExecutive Vice PresidentWells Fargo Capital Finance

While cotton prices have come down in the 50 percent range, there has still been a lag on decreases in prices quoted to our clients on cotton products. For those in the T-shirt and fleece business, some had opted to make large buys earlier in the year, while others had forged closer alliances with large suppliers to guarantee acceptable prices. Unfortunately, the recent increases had caused many companies to book orders that were essentially break-even deals in an effort to keep top-line volume and retail relationships intact until prices normalized.

Since prices continue to fluctuate and it’s hard to gauge where they’re really going, we believe that the best course of action remains for clients to continue to develop stronger ties with key suppliers while making sure that the focus remains on bottom-line profitability, as opposed to top-line sales volume.

We’ve also begun to see some acceptance of wholesale-price increases, which should help manufacturers and importers begin to recapture margins after a challenging first half of the year.

Ken WengrodPresidentFTC Commercial Corp.

The way I see it, the market is still pretty unstable. Companies should be very careful in what they do. I don’t see cotton prices going up much more.

When Pakistan’s crop in October comes in, which should be a bumper year, prices should go down. And cotton demand is dropping as people switch to other fabrics.

Manufacturers, however, should not speculate. They should do what they do best, which is manufacture. With cotton prices dropping, they should get a better yield on their profits.

Manufacturers should consider that the price will stay close to $1 a pound for the next 12 months, and they should run their businesses based on today’s prices and not think they have to buy fabric now and speculate.