Pass-Through Analysis of Cotton Prices

Persistent questions when analyzing supply chains are how much a change in input costs at one stage in the supply chain affects prices downstream and how it long does it take for changes in price to take place. The record high levels and unprecedented volatility in cotton prices during the 2010/11 crop year reinforced the importance of understanding these pricing relationships. However, given that the magnitude of the increases in cotton prices had never occurred previously, analysis presented at last year’s Beltwide Conferences was only able to answer these questions hypothetically; by examining the amount of cotton in different textile products, estimating the amount of waste involved in manufacturing process, and then deriving the hypothetical effect of higher cotton prices on finished apparel goods. With the time that has passed since the peak in cotton prices, an examination of the pass-through of cotton prices through textile supply chains can now be addressed using observed changes in prices downstream from fiber and yarn. These observed data are analyzed using time series methods to formally develop answers to questions regarding the magnitude of changes in cotton prices relative to the magnitude of prices downstream, as well as how long it takes for these changes to occur.