The last time cotton prices were this high, it was July 2011.

“In 2011, we needed a prayer meeting,” Levi Strauss Chief Executive Chip Bergh told investors on an earnings call Wednesday.

Bergh recalled how he had just joined the denim retailer and was learning his way around Levi’s business. But he was also staring down a historic surge in cotton prices. Cotton had skyrocketed above $2 a pound, as demand for textiles rebounded from a global financial crisis, while India — a major cotton exporter — was restricting shipments to help its domestic partners.

The price of a cotton T-shirt rose about $1.50 to $2, on average, National Retail Federation Chief Economist Jack Kleinhenz said. Consumers felt the impact. And it also ate into companies’ profits.

Bergh sits in the camp with analysts and experts who say the current cotton price inflation will be less damaging to the industry. Manufacturers and retailers have pricing power. Companies will be able to pass along the higher costs without destroying consumer demand.

“It’s a very different situation today,” Bergh explained. “We’ve been able to take pricing over the last 12 months and it’s sticking. … We priced ahead of some of these inflationary pressures hitting us.”

Cotton prices surged to a 10-year high on Friday, reaching $1.16 per pound and touching levels not seen since July 7, 2011. The price of the commodity rose roughly 6% this week, and is up 47% year to date. Analysts note that gains are being intensified

Xinjiang region over concerns it was being produced using forced labor by the Uyghur ethnic group. The ruling, which has remained in place during the Biden administration, has now forced Chinese companies to buy cotton from the U.S., manufacture goods with that cotton in China, and then sell it back to the U.S.

Extreme weather, including droughts and heat waves, have also wiped out cotton crops across the U.S., which is the biggest exporter of the commodity in the world. In India, deficient monsoon rains threaten to hurt the country’s cotton output.

The dynamic has already pressured shares of HanesBrands, an apparel manufacturer known for its undergarments and cotton T-shirts. Historically, HanesBrands shares fall as cotton prices rise. The stock tumbled 7% over the past week. On Friday alone, shares shed 5% to close at $16.23.

‘Real pricing power’
Credit Suisse analyst Michael Binetti said he views any worries or pullbacks on retail stocks because of the rising cotton prices as overblown.

He said only 2% of HanesBrands’ cost of goods sold comes from direct cotton purchases. Back in 2012, that figure was higher, at 6%.

Following the runup of cotton prices in 2011, HanesBrands hiked the prices of various cotton goods by a double-digit percentage three times, through 2012, to offset the inflation, Binetti said. HanesBrands’ profits still shrunk from all the costs it was facing. But ultimately, the company maintained some of those price increases. Today, it is in a healthier position with stronger profit margins, the Credit Suisse analyst said.

“We think the stocks are under-appreciating the most powerful dynamic that this sector has not had in over a decade. Real pricing power,” Binetti said.

Retailers have achieved that pricing power by proactively veering away from discount channels and culling excess inventory. The Covid pandemic has acted as a “cover” for companies to accelerate this shift. Ongoing supply chain bottlenecks have also played a role in tightening up inventories. This dynamic has driven costs up so much, businesses are raising prices and consumers are still buying.

“We think inventory will remain rational, margins will remain strong, and retailers will be able to push bigger and more consistent price increases than they’ve been able to for over a decade,” Binetti said. He expects the cotton inflation will be transitory.

UBS analyst Robert Samuels said the retailers he expects to be hardest-hit by the rising commodity prices are those that specialize in denim. Cotton accounts for more than 90% of the raw materials used to make jeans and other denim goods.