After a tumultuous year that saw raw cotton fiber prices rise to historical highs, and retailers scrambling to keep things in check for consumers, prices and production have leveled heading into Holiday 2011.

"We have not noticed a downturn in cotton [apparel] selling," says Belk's John M. Thomas, executive vice-president, private brands.

On the other hand Richard Noll, Hanesbrands Inc.'s chairman and CEO, says volatility will remain a concern.

"We're probably going to have to deal with a highly volatile situation for a long time to come," Noll said in a conference call with analysts. "Where it's all going to settle out for 2012 is anybody's guess."

Despite these increases, consumers still prefer cotton and are even willing to pay more for it. Seventy-five percent of all consumers say better quality garments are made from all-natural fibers such as cotton, and more than half of all shoppers (53%) are willing to pay more for it, according to the Cotton Incorporated Lifestyle Monitor™ Survey.

PVH chairman and CEO Manny Chirico told analysts the company expects to see a pull-back in costs of 8-to-10% in spring 2012, compared with this year's holiday prices.

"If those trends would continue, we could actually see a decline in cost as we go into the second half of next year," he said. "But that again is all to come, so indications are that there should be some margin recovery if we are able to hold the retail prices into the second quarter of next year [and] into third and fourth quarter of next year as well."

Cotton is trading around 90 cents per pound, lower than the values near 110 cents per pound a year ago and much lower than this spring, when fiber prices spiked to nearly $2.20. Several factors contributed to the decline in prices, including the high cotton prices last spring. With cotton offering more competitive prices relative to other crops, growers planted more cotton. This led to an increase in cotton planted acreage and to expectations of a record global cotton harvest this fall. Although the world cotton harvest forecast is 3.6 million bales smaller than was initially forecast in February, says Jon Devine, economist with Cotton Incorporated, current figures remain 7% larger than 2010/11, and approximately 1% larger than the previous all-time record set in 2006/07.

In November, the U.S. Department of Agriculture set its world consumption estimate for 2011/12 at 114.3 million bales, essentially the same level as in 2010/11. With consumption stable and production higher, the increase in the expected size of the harvest is estimated to result in cotton production significantly exceeding world cotton consumption for the first time in six years. Current world production is estimated to be 9.6 million bales higher than world consumption. The corresponding addition to world ending stocks is expected to keep cotton prices well below their 2010/11 peaks.

The USDA reports the 2011 U.S. cotton crop is projected at 16.3 million bales. The 10% decline in production for the 2011/12 crop year can largely be attributed to the extreme drought conditions in Texas, which reduced the harvested acreage estimate below the 2010 level. Meanwhile, upland production is expected to increase in the Southeast, Delta, and West regions. With these increases, and with production forecasts for the Southwest considerably lower than a year ago due to the ongoing drought, the Southeast is forecast to be the largest production region this season, a first in more than four decades.

Since cotton represents a significant portion of their raw material costs, apparel companies like Hanesbrands Inc., and PVH Corp., whose labels include Calvin Klein and Tommy Hilfiger, could do quite well thanks to lower cotton prices, according to Citi Investment Research's Kate McShane.

Although some manufacturers are trying to hold costs by substituting synthetic fibers, most consumers would rather their product remain pure. The majority of consumers would prefer to pay a slightly higher price to keep cotton from being substituted with synthetic fibers in their denim jeans (59%), followed by their T-shirts (52%), Monitor data reveal.

Capital Business Credit, a commercial finance company specializing in the retail sector, reports consumer prices are expected to increase significantly this fall, as more retailers and manufacturers stop absorbing all the price increases of labor, raw material and shipping. The percentage of companies that said they would pass on increased costs rose from 20% six months ago to 30% in the CBC survey. But that should not be a problem for most retailers. The Monitor survey shows consumers are willing to spend more for their cotton apparel. For example, shoppers would pay about 22% more for a pair of cotton denim jeans, from their current $27.83 up to $34.04. The same holds true for cotton T-shirts, where consumers say they will pay 28% more, from $9.91 to $12.64. For cotton dress shirts, consumers normally pay an average of $20.85 but are willing to pay 21% more for a maximum of $25.26.

Andrew Tananbaum, executive chairman of CBC, says his firm's survey revealed other reasons to be hopeful.

"One-third of those surveyed believe that despite current market challenges, retailers will increase inventories this holiday season," he said, adding, "Looking forward to the spring season, we anticipate prices to decrease at retail, due to forward-looking data on the decline in cotton prices."