One year ago, cotton prices were soaring and the apparel industry feared consumers would react by curtailing spending.

Although prices on cotton apparel did increase, shoppers have continued or increased their clothes shopping, which the Commerce Department reports was  5.3% higher in January compared to the same year-ago period.  Now that world cotton prices have dipped and remained stable for several months, the outlook is positive for the remainder of 2012.

Kurt Salmon’s Vinod Rangarajan, retail strategist, says softer raw cotton prices will begin reducing manufacturing costs later this year. “It will be interesting to see if stores lower prices, or if the increased prices remain and we’re at a new normal. It’s hard to go backwards once things go up.  It actually could mean better margins for retailers.”

The fact that sales of cotton apparel did not drop reflects the fact that 76% of consumers say cotton and cotton blends are their favorite fibers to wear, according to the Cotton Incorporated Lifestyle Monitor™ Survey.

The International Council on Shopping Center’s Mike Niemara, chief economist, says sales stayed strong, even though consumers were forced to pay more at the cash registers. “It was clear a lot of the price increase was passed on to consumers.  But it didn’t have the dire consequences a lot of industry people feared,” Niemara says.  “The increased prices were just one part of so many things that were going on with the economy — there was no big reaction.”

[quote]Among consumers who have purchased apparel in the past six months, nearly 7 of 10 say prices increased from last year, the Monitor survey shows.  However, 54% say many of the clothes that used to be made from cotton now seem to be made from other fibers, and 53% say recent clothes purchases don’t seem to last as long as they used to.

That could be because some apparel makers looked to offset the price increase by blending cotton with other fibers.  However, research shows consumers are resistant to such fabric manipulation.

Nearly 6 out of 10 consumers are bothered that brands and retailers may be substituting synthetic fibers for cotton in their T-shirts (58%) and jeans (58%), followed by sweatshirts/hoodies (52%) and dress shirts (52%), according to Monitor data.

Additionally, consumers are more confident about the economy and thus perhaps more willing to purchase their preferred fabric.  Compared to just a few months ago, significantly more consumers say they prefer to pay a slightly higher price to keep cotton from being substituted with synthetic fibers in their jeans (57% to 63%), dress shirts (45% to 52%), casual pants (42% to 48%), dresses (34% to 44%) and skirts (31% to 38%), according to the Monitor. And declines in cotton prices should further encourage makers to forego any substitutions.

Jon Devine, economist for Cotton Incorporated, says cyclical factors will likely result in lower prices for the foreseeable future. “The peak in last year’s prices coincided with the time period when farmers were deciding what crops to plant. Farmers planted a record amount of cotton for the current crop year and a record cotton harvest is forecast.

“In addition to prompting farmers to plant more cotton, last year’s high prices also led to some declines in world cotton consumption.  The combination of a record harvest and lower consumption means that fiber supplies are relatively plentiful,” so prices that began decreasing last year will likely remain low.

For the past few months, New York cotton futures have been trading at levels between 90 and 95 cents per pound, while world cotton prices have been trading near $1.00.  At this time last year, prices were reaching all-time record highs: New York futures prices reached $1.19 per pound and A Index world values were as high as $2.43.

Niemara says retailers can breathe a bit easier now that cost pressures from cotton have eased.  “At the end of the day, margins will be better this year, I think, than last.  We’re also in a better position because economic conditions seem stronger.”

February hiring data beat expectations as U.S. employers added 227,000 jobs, according to the Labor Department.  The U.S. service industry rose to 57.3 for the third straight increase, according to the Institute for Supply Management. And the Federal Reserve reported consumer borrowing increased $17.8 billion January.

There are, however, some other factors that could affect cotton prices heading into next year.  Drought conditions continue in West Texas, the world’s largest contiguous cotton growing area, which could impact the 2012/2013 supply.  Another factor is China, which possesses nearly 30% of the world’s warehoused cotton.  World cotton prices would be affected if China tries to purchase large volumes again next year, Devine says.

Meantime, India recently placed a ban on cotton exports.  “If the export ban is sustained in the face of farmer protests, it could have some influence on world prices,”  Devine says.

Despite the potential for volatility, Rangarajan doesn’t expect 2012 prices to increase.

“Retailers dipped their tails in that water last year and the customer was not thrilled with it, so going higher won’t play well.  My suspicion is prices will stay where we’re at.”