Levi’s, Cotton, and Climate Change
When 95% of your product line is made from one agricultural commodity, climate change is a big deal.
Levi Strauss & Co.’s trademark jeans are made exclusively from cotton, as the company boasts on its website: “Every pair of Levi’s is made with the best fabric for fit: Natural cotton.”[1] Nearly 95% of Levi’s products are made from cotton.[2]
A company so exposed to a single agricultural commodity needs to seriously consider the impact of climate change on its supply chain. Per a report by the FAO, IMF, World Bank, and other intergovernmental agencies, climate change will adjust agricultural production patterns around the world, with climate-induced supply stresses as a driver of price volatility.[3]
How could this affect Levi’s? In the company’s 10-K, the potential for impact is clear:
“The price fluctuations [in cotton] impact the cost of our products in future seasons given the lead time of our product development cycle. We have already raised, and may continue to raise, product prices in an attempt to mitigate the impact of these fluctuating costs. Fluctuations in product costs have caused a decrease in our profitability.”[4]
Later, Levi’s makes the link: “The price and availability of cotton may fluctuate substantially, depending on a variety of factors… Any and all of these factors may be exacerbated by global climate change.”[5]
How will climate change impact the global cotton market?
Cotton is sensitive to water availability. While it is grown in more than 70 countries, its growth is concentrated in a few areas which are likely to see climate-related water stresses:
- In China’s Western Xinjiang region, there is expected to be a decrease in water availability. Production along the Yangtze river will also suffer from food crop competition.
- Northern Indian production may suffer as less water will be available from the Himalayas and Tibetan Plateau, and varying monsoon intensities may cause variability in production conditions.
- In the Southwestern and Western US, competition for water use is likely due to groundwater depletion and inconsistent meltwater from the Rocky Mountains. Southeastern production will likely increase, however.
- Pakistan’s production will likely suffer the most from climate change due to reduced flow to the Indus River.[6]
Combining a likelihood for production volatility with relatively inelastic short- to medium-term demand, Levi’s will have to contend with the possibility of massive seasonal price hikes and supply shortages.
Levi’s Options for the Future
Despite being exposed to cotton price and availability risk, Levi’s has five options to reduce that risk.
First, Levi’s can hope that endogenous crop science innovations, like Indigo Agriculture’s Indigo Cotton, will substantially mitigate the impact of climate-related shocks on cotton production. Perhaps possible, but not an assumption to rest one’s business model upon.
Second, Levi’s can raise prices, creating a margin buffer. As quoted before, Levi’s has already done this. However, significantly higher prices will push existing customers to other, lower-priced brands in this competitive industry.
Third, Levi’s can push commodity risk downstream: Levi’s 10-K suggests that their supplier pricing is dependent only in part on raw materials pricing,[7] which means they may lock-in seasonal pricing with their suppliers. Risk pushed to suppliers is still tangible for Levi’s.
Fourth, Levi’s can explore non-cotton materials for its clothing lines. In fact, Levi’s Performance Stretch Jeans include 3% polyester and 2% elastane.[8] These boundaries could be pushed further, as American Eagle’s Extreme Flex jeans are made with a mix of cotton, 9% polyester, and 2% elastane.[9]
Complete substitution of cotton may also be considered: Other cellulosic (plant-based) fibers such as rayon have been used to make jeans. Synthetic alternatives, such as oil-based polyester, may also be options. However, it is unclear that any other cellulosic or synthetic material would give the same feel as cotton. Plus, the brand risk of offering a polyester jean makes this option particularly unpalatable.
Fifth, Levi’s can invest in cotton recycling technologies. Using recycled, instead of virgin, cotton would shield Levi’s from commodity price spikes. Traditional cotton recycling uses mechanical shredders that shorten the cotton fibers’ staple lengths – in essence, lowering the quality of the cotton. According to QZ, Levi’s can use a maximum of 20% traditional recycled cotton in a garment before it no longer meets quality standards.[10]
To combat this issue, a few startups are developing technologies that can chemically recycle cotton without decreasing staple lengths. Levi’s has developed a partnership with Evrnu, one of those startups, in which they’ve developed a prototype pair of jeans made from a higher percentage of recycled cotton.[11]
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[2] Levi’s Annual Report, 2011. P15.
[3] “Price Volatility in Food and Agricultural Markets: Policy Responses.” FAO et al. 2 June 2011. Page 11.
[6] “Cotton and Climate Change: Impacts and Options to Mitigate and Adapt.” International Trade Centre Technical Paper. 2011.
[7] Levi’s 10-K, 2011. Page 9
[10] “Why Cotton is so Difficult to Recycle and How Clothing Retailers Hope to Change That.” Article link.
Interesting article Rob! As you clearly state, climate change has a strong impact on textile manufacturing due to its reliance on different natural resources, in this case water. Reading Levi’s options, I find it interesting that they are not considering some kind of vertical integration towards cotton suppliers, but rather pushing the risk towards them. I find this very surprising, as pushing the risk could, in some cases, lead to suppliers being unable to manage their business profitably and hence to a shortage on suppliers and cotton which would further increase prices. Considering this point, investing in researching new water irrigation technologies that could help in volatility reduction could help Levi’s approach their dependence on water availability and further secure a constant supply of their primary input.
Thanks Rob. I think that the most compelling option here is crop science — is there a way to get cotton to grow with less water, or to increase yield per acre? To me, the cotton crop presents a great candidate for genetic engineering, as cotton is not a food and so might be subjected to less regulation. Without scrapping their primary brand identity and differentiation factor by moving away from cotton, it seems that Levi’s needs to examine this or else raise prices to compensate. Has there been any attempt on the part of the garment industry at large to fund some of this genetic engineering research?
Good read – many people don’t think twice about how much water goes into the production of textiles. Exciting to hear that Levi’s is partnering with a startup to explore recycling. I think there is a lot of opportunity for product innovation using recycled materials, and customers seem to be receptive to buying products they know use recycled materials. Nike is one example of a company that is recycling waste in their new products and promoting as such. Separate from this partnerships, do you know how much recycled cotton Levi’s is currently using in its production? The 20% maximum dictated by quality standards sounds low but could still provide a lot of value if Levi’s is not currently recycling any material. I know many clothing manufacturers, Levi’s included, have programs where they accept recycled clothing, but most of that is donated, and they can have negative impacts on the local textile industries of the countries where they are donated. Would be great to see clothing manufacturers “close the loop” by using recycled materials directly in their own manufacturing.
To your first point, it seems that Levi’s could develop a similar partnership with an organization that will focus on crop science innovation for cotton. The major industry players could fund a cooperative partnership that would research on their behalf and work with cotton farmers to improve their harvest.
Lastly, I think Levi’s should also consider the consumer’s laundry habits when developing new products, since most of the water wasted during the jean’s lifecycle is actually during its care, and not production. Of course, this type of product innovation won’t directly help Levi’s bottom line, but water is a shared resource, and anything that can be done to change consumer’s behavior will help relieve global water stresses.