Though it is an inexpensive textile to produce, price levels for cotton this year are set to have increased by 50%, with the price of clothing by all major manufacturers being affected. The reason for this inflation can be attributed to several factors.
Poor weather in India
India is the world’s second largest supplier of cotton and this year’s poor weather has not only reduced the quality of the cotton produced there but has also hampered the country’s harvesting efforts. The lowest cotton harvest in 16 years has made the Indian government speculate on place a cap on cotton exports it allows. In addition to this labour costs have been increased fourfold over the past five years causing cost-push inflation.
Low supply worldwide
As countries like the United States and China have low reserves in cotton, worldwide demand for cotton is far outstripping supply. The worldwide decrease in the crops of cotton can be linked back to the financial crisis two years ago. In the attempt to earn more money, many farmers stopped planting low-value cotton in favour of more profitable crops such as corn and soya. Now that the weather has affected the remaining crops quality, retails have been left grappling for the remaining worldwide supply.
Exchange Rate crucial
For British retailers the strength of the pound has been of key interest as the great majority of clothes are bought from the Far East, particularly China and Bangladesh in dollars, but sold in Britain in sterling. The poor strength of the pound has meant that the price of raw materials and freight costs have increased for British importers of cotton clothes.
20% VAT in January
While there are all these increases in cost for cotton producers, VAT is also set to be increased to 20% at the beginning of 2011. This will put large pressure on clothing stores who already have very tight profit margins as it is. In an attempt remain profitable, big high street names like Primark, Next and Debenhams are all set to increase their prices over 2011.