You may soon feel the financial sting as soaring cotton prices work their way from the cotton fields, to the textile mill, to the apparel manufacturer, to the retailer, and finally to that new pair of pants or dress you’ve had your eye on.

According to the National Cotton Council, the international price of raw cotton, as indicated by the Cotlook “A” Index, has increased 145.9% from April of 2010.

In the U.S. Bureau of Labor Statistics Producer Price Index (PPI) report released May 20, 2011, the cost of processed yarns and threads has increased 28.8% from April 2010 while the cost of finished fabrics has increased 7.4%. It further shows that the cost to retailers of women’s, girls’, and infants’ apparel increased 0.7 %, men’s and boys’ apparel increased 2.3%, and textile house furnishings increased 2.6%.

Apparel costs for the consumer have held relatively steady from this time last year. The U.S. Bureau of Labor Statistics Consumer Price Index (CPI) report released May 13, 2011, shows the average cost to the consumer of apparel has increased only 0.1% from April 2010.

But the clothes you buy today were made from cotton that was purchased months ago. That lower priced cotton has now worked its way through the manufacturing process. From raw cotton, to thread, to fabric, to finished apparel, to the retailer’s rack, each company along the way must decide how much of the increase in the price they paid for materials used will be passed on and how much they will absorb. Setting an item’s price is a delicate balancing act between pricing it high enough to cover costs and maximize profits, versus pricing it so high as to drive away consumers.

With increasing prices for food and fuel already taking a larger portion of consumer income, the soaring cost of cotton may have caused that balancing act to reach a tipping point where costs cannot be covered without driving away customers. There was an indication of this Friday when comments by several large retailers regarding the rising cost of cotton triggered a mass sell-off in apparel stocks.

GAP Inc. (NYSE:GPS), the largest U.S. apparel-specific retailer by sales, was the largest decliner in the Standard & Poor’s 500 Index Friday when it closed at $19.26 a share, down 17.3%. In their First Quarter Earnings Report for Fiscal Year 2011, released May 19, 2011, GAP stated, “the company expects business performance during fiscal year 2011 to be heavily impacted by pressure from sourcing cost inflation.” They go on to say that the increase in their cost of goods was higher than expected. “The company now expects product costs per unit to be up about 20 percent in the back half of the year, which will more than outweigh retail price increases.”

Cause and Effect
The four major factors that are contributing to the skyrocketing cotton prices are increasing world population, the decline of the U.S. Dollar, rising oil prices, and severe weather in various parts of the world over the past year.

Populations in developing countries are increasing rapidly. These same countries, mostly China, India, and Brazil are experiencing increased urbanization and an expansion of their middle class. This means that there are more people with the discretionary income and the desire to spend it on apparel.

According to Joseph W. Glauber, Chief Economist, USDA in Prospects for the U.S. Farm Economy in 2011, “China is now forecast to be the top market for U.S. agricultural exports in FY 2011 at $20 billion and currently accounts for 40 percent of world cotton imports.” He goes on to say that record high cotton prices should result in increased cotton acreage for 2011, forecast at 13 million acres, an increase of almost 2 million acres. He states that, “Improved returns could lead producers to plant cotton on cropland previously planted to corn, soybeans, sorghum, rice, and other crops.”

A recently released report by The World Bank projects that global wealth and asset holdings will shift toward emerging economies.

This chart shows projected international investment position (IIP), a financial statement setting out the value and composition of that country’s external financial assets and liabilities, over the next 15 years.

The USDA Agricultural Projections for 2011-2020 report states, “The U.S. dollar is assumed to depreciate over the next decade.” Additionally, “The depreciated U.S. dollar since 2002 and its continued decline through the projection period makes U.S. agricultural exports increasingly competitive in international markets.” It also states that, “China and India together account for 37 percent of the world’s population.”

With cotton quickly becoming the new cashmere, now is the time to buy that new pair of pants or dress while you can still afford it.

The post Soaring Cotton Prices first appeared on The How Do Gardener.

According to the US Bureau of Labor Statistics, Consumer Price Index Data for March 2011, the Consumer Price Index for fresh vegetables purchased for home use rose 4.7 percent in March after a 6.7 percent increase in February, as indexes for potatoes, lettuce, and tomatoes all posted significant increases.

Let’s take a look at the two major indexes used by the government to measure changes in price over time.

The Producer Price Index (PPI)
The Producer Price Index (PPI) measures the change over time in selling price received by domestic producers for their goods. An example of this would be the price that a farmer receives when he sells the potatoes he’s grown to a grocery store.

The Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures change over time in the price paid by consumers. In our example, the price you pay for those same potatoes when you buy them at that grocery store.

Something to Consider
The retail price (CPI) of fresh table stock potatoes has risen 14.2% from March 2010 to March 2011. That’s a large increase. But, the PPI for fresh table stock potatoes rose 65.7% over the same period. That means that while the grocery store paid 65.7% more for potatoes than they did last year, they are only charging you 14.2% more.

For whatever reason, the REAL price of those potatoes is not yet being passed on to you. It could be that out of the sheer kindness of their hearts the grocery store has decided to take a huge loss on potatoes and many other products. More likely, if the cost you were asked to pay for potatoes suddenly increased 65.7% the next time you went to the store, you’d probably just do without potatoes. Imagine if your entire grocery bill were to increase 65.7% tomorrow. What would you do?

The point being, there are still plenty of price increases already in the “pipeline” just waiting to be gradually added to your grocery bill.

Reasons Why
There are four long-term trends that are contributing to our skyrocketing food prices: Population, The Value of the U.S. Dollar, Oil Prices, and U.S. Biofuels. Severe weather in various parts of the world over the past year also played a role.

Population
Populations in developing countries are increasing rapidly. These same countries, mostly China, India, and Brazil are experiencing increased urbanization and an expansion of their middle class. This means that there are more people, fewer of them growing their own food, and more of them with money to spend on new and diverse foods. Year-to-date U.S. potato exports to China alone have increased 37% from March 2010 to March 2011.

The Value of the U.S. Dollar
Since there are more dollars being printed, each of these dollars is now worth less and it takes more dollars to buy something. As the value of the dollar decreases, our cost for food goes up. The potato you just bought from the grocery store is still just a potato. It is no different than the potato you bought from that same grocery store last year. An ounce of gold is still an ounce of gold, no different than an ounce of gold purchased last year. It just takes more of your dollars to buy it.

As the value of the dollar goes down compared to other currencies, the cost to purchase that same potato goes down for purchases made with another currency. Exports of potatoes increase and there are fewer potatoes for domestic consumption.

Oil Prices
We have all noticed the sharp increase in the cost of gas at the pump. These increases raise the production and transportation costs in the agriculture sector. It costs our farmer more to fuel his tractor and more to transport his potatoes from the farm to the grocery store.

U.S. Biofuels
Besides being used for human consumption, corn is the major feed component used in the beef, chicken, pork, and dairy industry. The price of a bushel of corn has increased 56% since 2009. This year 37% of all corn produced in the U.S. will be used for the production of ethanol. That is corn that will not be available for food production. Ethanol has created an artificial market for corn, according to economist Bill Lap of Advanced Economic Solutions. Lapp, the former Chief Economist of ConAgra Foods, says he doesn’t believe the ethanol industry could survive without government ethanol mandates and the 45-cents-per-gallon tax credit available to U.S. blenders of ethanol. “We’ve displaced only minimal amounts of crude oil imports by virtue of having the ethanol policies in place.”

Aren’t Things Getting Better?
Here are some statements from The USDA Agricultural Projections, February 2011:

“The U.S. dollar is assumed to depreciate over the next decade.” “The depreciated U.S. dollar since 2002 and its continued decline through the projection period makes U.S. agricultural exports increasingly competitive in international markets.” “China and India together account for 37 percent of the world’s population.” “Retail U.S. food prices will rise faster than the general inflation rate in 2011 and 2012.” “World market grain prices are expected to remain well above historical levels for the next decade.”

Conclusion
I’m not an economist, a statistician, a financial advisor, or a fortune-teller. This is just how I see things from here in my garden. But as for me, the next time I think about investing in something, it will probably be another potato plant in the garden, or an extra can of corn from the grocery store before the price goes up another 51%. As you can see, having a vegetable garden really is as good as gold.

The post Rising Food Costs Mean there’s Gold in your Garden first appeared on The How Do Gardener.