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As Cotton Prices Rise, Polyester Follows

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With cotton prices up 150% since August, apparel manufacturers have been looking for any way possible to contain costs.

Aeropostale (ARO) is reducing the size of tags in garments, saving five cents on each piece of clothing.

Big-box retailers like Wal-Mart (WMT) are "re-engineering" their fabric blends, to include more synthetic fibers in an attempt to keep prices low.

But "strong brands like Ralph Lauren (RL) or Coach (COH) won’t be kissing their rolls of cotton goodbye any time soon," according to a recent Reuters report, which says "they’re sticking by cotton and reconciled to inevitable price hikes at retail as the cost to make apparel rises between 10 to 20%."

Of course, as the price of cotton goes, so goes the cost of alternatives.

As apparel makers have sought alternatives to cotton, prices for other materials, like bamboo and silk, also spiked. Even demand for wood pulp — used to make polyester — is up.

“You can’t avoid the cost increases,” Jeremy Rubman of Kurt Salmon told the Boston Globe. “Now there’s not even enough polyester to go around.”

Which is exactly what money manager Shawn Hackett, founder and CEO of Hackett Financial Advisors, predicted.

""If there were such a thing as polyester futures, I would've gone long months ago," he tells us. "There are always certain relationships that have a good connection as far as playing one off against the other: wheat/rice, natural gas/crude oil, gold/silver. When cotton ran up, it was only natural synthetics would follow."

At its peak, cotton was four times as expensive as poly, Hackett explains -- a substantial arbitrage that is now narrowing.

"When you get that narrowing, the markets find a better balance," he says. "As petroleum-based fibers -- which obviously also respond to crude oil prices -- get too expensive, the pendulum swings the other way. Now, cotton prices are beginning to break down against synthetics, which are relatively firm and the reversal process begins."

However, Hackett is quick to point out that "these are long cycles; it will take a while, maybe two years, to see a full shift."

In the meantime, expect price increases in all products with exposure to oil prices -- the Washington (Pennsylvania) Observer-Reporter says this includes "everything from the coloring in your toothpaste, to shampoo, plastic water bottles, house paint and even golf balls."

As petroleum products are used in the manufacture of these items, the blame doesn't rest directly with rising transportation costs.

"We drive from our living room to our bedroom. We hold two plastic bottles in one hand and three in the other," Wright State University professor Riad Ajami, director of the Center for Global Business at the Raj Soin College of Business, tells the paper. "We are an energy dependent economy."
POSITION:  No positions in stocks mentioned.

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