Repercussions from the supply shock continue to spread, with cross-market implications for both synthetic and organic fibers that will disrupt global apparel supply chains.
The development will bleed into consumer pricing dynamics, affecting goods that one does not normally associate with an oil shock, like clothing.
It’s happening with cotton, the world’s most heavily used natural fiber. Its price on the New York Board of Trade-ICE futures market increased by 30% from the start of the war on Feb. 28 through the second week of May.
Although those prices eased in the past week, cotton futures were still up by 19% through May 21.
According to a recent report from the Department of Agriculture, a drawdown in stocks of cotton, combined with resilient consumer demand and a global oil shortage, are all pushing up cotton prices.
A drought in the Southeast region of the U.S., which is a major exporter of cotton, has only added to the pressure.
But it’s not just about cotton. Polyester, which is derived from petroleum and is the world’s most heavily used clothing fiber, has increased as well, which in turn has pushed up demand for cotton.
None of this rise in cotton should come as surprise.
In the 10 years before the Iran war, the producer price index for cotton and the price of Brent crude have a correlation coefficient of 0.75, indicating a strong relationship.
Put more simply, the oil market and the cotton market move in tandem.
We can see this dynamic in spikes up and down during periods of distress, whether it’s because of energy shocks or economic downturns.
Most recently, the U.S. producer price index for cotton increased by 15.5% in April on an annual basis, which came at the same time that crude oil spiked by 80%.
The takeaway
The price of crude is having an effect on petroleum-based synthetic fibers and organic fibers like cotton that extend deep into consumers’ lives.
Expectations of rising demand for cotton while supplies are limited has contributed to higher cotton prices on the futures market.
That recent spike is related not only to climate factors in the Southeast, but also to expectations of higher costs for petroleum-based synthetic fibers and increased demand for organic fibers.
