Organically grown cotton can cost twice or even three times the price per pound of cotton grown using traditional methods. Cotton is a resource intensive crop. It sucks nutrients from the soil that must be replaced by fertilizers or crop rotation.

Wal-Mart has been buying clothing manufactured with organic cotton for several years. It all began with yoga pants in 2006.

Today [in 2006], Wal-Mart and Sams Club stock a range of organic cotton products – baby clothes under the Baby George brand, teenage fashion, and a line of bedsheets and towels. They’ve sold 5 million units of organic cotton ladies apparel in the last two years, insiders say.

In none of this was Wal-Mart an innovator. Patagonia converted its entire sportswear line to organic 10 years ago. Nike promoted organic cotton, as did others, like Eileen Fisher and Timberland . Retail sales of organic cotton have doubled, from $245 million in 2001 to $583 million in 2005.

But the global supply was growing rapidly too, and some farmers who converted to organic methods, which can cost more, could not find buyers willing to pay a premium. They were forced to sell their crop into the conventional cotton market at lower prices.

Wal-Mart’s entry has changed the game. Five years ago, global production of organic cotton amounted to about 6,400 metric tons. In 2006, Wal-Mart and Sams Club will use about 6,800 metric tons. “They will be the largest buyer, by far,” says Klein.

Just as important, Wal-Mart has made a verbal five-year commitment to buy organic cotton, giving farmers the assurance they need to produce it.

So why is it news this morning that Wal-Mart is paying organic prices for 12 million pounds of not-yet-organic cotton? Because it’s Earth Month and it makes for good public relations.

From Reuters:

Wal-Mart Stores Inc said on Monday that it purchased more than 12 million pounds of cotton from farmers who are changing over from conventional to organic farming, to help boost the supply of certified organic cotton in the marketplace.

The change over is the tricky part. Farmers need three to five years of organic practices before their crop is certified as organic. It takes time for all the previously used chemicals to leave the soil. During that time the farmer is spending more money, but not selling at the greater price for organic crops.

To encourage farmers to switch to organic cotton farming, Wal-Mart said it purchased more than 12 million pounds of transitional cotton from approximately 1,000 farmers at the same premium cost of certified organic cotton.

That’s the part of the story I find interesting. Wal-Mart is buying raw material, not finished goods. It then has to sell the cotton to a manufacturer who will make t-shirts for the company to sell in its stores.

That’s a level of vertical integration for Wal-Mart that I was not aware of before.

And since the cost of the cotton is significantly more than traditional cotton, is this how Wal-Mart keeps the price of the finished product close to its normal price?

I’ve been wondering where Wal-Mart would find cuttable costs in its quest to drive prices lower. Is this a glimpse of Wal-Mart’s future?

Jeff Hess: Have Coffee Will Write.

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This entry was posted on Tuesday, April 8th, 2008 at 0625 by Jeff Hess and is filed under Economics, Environment, Organics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.