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Cotton Prices Rise as Chinese Output Falls Short

A shortfall in China's cotton production could mean U.S. retailers will have to pay their Chinese suppliers as much as 30 percent more for apparel

Gap (GPS), J.C. Penney (JCP), and other U.S. retailers have long benefited from low costs in China to hold down prices in their American stores. A cotton shortage may help change that equation.

China's farms produce about 26 percent of the world's cotton, yet that's not enough to satisfy the needs of the Chinese companies that make shirts, pants, dresses, and more for U.S. store chains. Cotton futures in China have surged more than 70 percent this year as the global economy emerged from recession and consumers worldwide started spending more on clothes. Production in China, the world's biggest user of cotton, is forecast to lag behind demand for a 12th year, cutting the country's stockpile to the smallest level since 1995, according to the U.S. Agriculture Dept. The shortfall gives local makers of cotton fabrics a lot of leverage in negotiating prices with apparel manufacturers. "It's a little terrifying to deal with cotton suppliers now," says Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise, a closely held clothes maker based in Jiangsu province that counts Gap and Penney's among its clients.

Chinese suppliers to the big U.S. retailers have to figure out if they can pass on their increased costs. Unitedtex, which sells $24 million worth of shirts and jackets annually to Gap, plans to raise prices by 5 percent to 30 percent for products available in April, Wu says. Shandong Zaozhuang Tianlong Knitting, which makes Polo Ralph Lauren (RL) T-shirts and track suits for Le Coq Sportif Holding, has raised prices as much as 70 percent from a year earlier. "If cotton keeps rising like this, we will need to lift prices by 30 percent by Chinese New Year or we lose money," says sales manager Fred Hu.

"American consumers better get used to rising prices on the shelves of Wal-Mart (WMT) and other retailers," says Jessica Lo, Shanghai-based managing director at China Market Research Group. "China's manufacturers are getting squeezed not only by rising cotton costs but also soaring real estate and labor costs." John Ermatinger, Gap's Asia president, declines to say whether Gap will raise prices. "We are going to be mindful of our competition," he says. "We are going to be mindful of our consumer. That's how we'll ultimately establish our prices."

The bottom line: Chinese apparel producers are being squeezed by a shortfall in the cotton supply. The result could be higher prices in U.S. stores.

Wei is a reporter for Bloomberg News in Beijing. Javier is a reporter for Bloomberg News.

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