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NewslettersThe Stockout

The Stockout: Shortages of cotton threaten CPG supply chains

Worries of shortages of cotton, corn, and soybeans are spiking supply chain costs for CPG companies. Three weeks ago I wrote about how soaring corn prices threatened unhedged CPG companies. Since then, there have been multiple geopolitical events (Chinese cotton ban, Argentina banning corn exports) that I will get into shortly that have resulted in supply constraints and have helped push the price of cotton, soybeans, and corn significantly higher. 

Imports have been strong from China over the past two quarters, but a ban on their biggest cotton manufacturing could have lasting impacts on textile imports. China accounts for 36.49% of total U.S. apparel imports and with only 2% of clothing made in the U.S. this ban threatens to have lasting impacts on CPG supply chains. 

If Chinese apparel imports dip and companies have to source their goods from other Southeast Asian countries or European countries, apparel companies’ transportation needs are likely to change. Southeast Asian countries (ex-China) tend to ship to the East Coast which means that companies can expect to need more truckload transportation on the East Coast rather than at popular West Coast ports such as the Port of Los Angeles/Long Beach. 

If apparel sales pick up over the next year, which I expect, then inventories could become depleted if apparel companies can’t act quick enough. I believe that it will be difficult for companies to shift production in their supply chains quickly enough to avoid disruption in their supply chain and in turn affect their sales. 

Source: macrotrends.net; Cotton prices

Since the low on April 1 of last year, cotton prices have ballooned by 65%, rallying consistently over the past nine months. Cotton is vital to the apparel industry, exposing companies such as Hanes Brands to global commodities markets. While many companies have agreements with suppliers that lock in prices for considerable amounts of time, eventually these costs will be inflationary if prices continue to rise.

It appears to me that there is a perfect storm currently brewing for inflationary cotton prices. First, demand is likely to rebound considerably over the coming year as consumers return to a more “normal” life and begin purchasing apparel yet again. Moody’s Investors Service predicts that operating profits at department stores will double in the coming year on a year-over-year (y/y) basis

On the supply side, the outlook is dimming. Weather conditions such as a lack of rainfall have limited cotton production in major production in key areas such as Texas. Recently, the International Cotton Advisory Committee cut its estimates for global cotton production by 1% and the U.S. Department of Agriculture expects the smallest crop in five years. 

On top of the lack of supply domestically, international supply is being strained after the Trump Administration banned cotton and cotton products produced by Xinjiang Production and Construction Corps (XPCC), a Chinese state-owned enterprise, after allegations of forced labor by Muslim Uighurs. XPCC is the nation’s largest cotton producer, producing 85% of the country’s cotton.

Source: macrotrends.net; Soybean prices

Soybeans have also been on a tear over the past three quarters with prices jumping ~60% since the middle of March and have recently gone vertical. Soybeans are vital ingredients for many breads, cakes, cookies, along with other goods such as dog foods. 

The rise in prices from soybeans stems from the same hardships that are facing cotton farmers, troublesome weather and trade issues. There is uncertainty surrounding the geopolitical situation in South America regarding exports. 

“As 2021 begins, it is once again the same concerns about limited supply from South America and strong Chinese demand that are driving up soybean and corn prices,” Commerzbank said in a note.

As alluded in the quote above, a lack of supply out of South America and strong Chinese demand is fueling both soybean and corn prices higher. Since I wrote the December 14 edition of The Stockout, corn prices are higher by another 14%. Last week, Argentina announced that they were banning exports of corn until March to assure that they have enough for domestic demand. 

So what does all this mean in regards to supply chains? Prices are increasing across multiple commodity groups which means that many food and apparel producers are going to have increasing supply chain costs in the coming quarters. Issues around human rights in China are not going away as a new administration enters the White House. Unless there are serious changes from China, it appears as if the global supply of cotton will be constrained until other countries can fill the void. 

In addition, some producers of soybean and corn could have smaller yields than previously forecasted which means that companies might have to turn to the futures market or different producers to satisfy demand which will likely add to costs in their input costs.  

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