{"id":9104,"date":"2016-11-03T19:57:35","date_gmt":"2016-11-03T23:57:35","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/levis-cotton-and-climate-change\/"},"modified":"2016-11-03T19:57:35","modified_gmt":"2016-11-03T23:57:35","slug":"levis-cotton-and-climate-change","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/levis-cotton-and-climate-change\/","title":{"rendered":"Levi&#8217;s, Cotton, and Climate Change"},"content":{"rendered":"<p>Levi Strauss &amp; Co.\u2019s trademark jeans are made exclusively from cotton, as the company boasts on its website: \u201cEvery pair of Levi\u2019s is made with the best fabric for fit: Natural cotton.\u201d<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a> Nearly 95% of Levi\u2019s products are made from cotton.<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a><\/p>\n<p>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.<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a><\/p>\n<p>How could this affect Levi\u2019s? In the company\u2019s 10-K, the potential for impact is clear:<\/p>\n<p><em>\u201cThe 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.\u201d<\/em><a href=\"#_ftn4\" name=\"_ftnref4\">[4]<\/a><\/p>\n<p>Later, Levi\u2019s makes the link: \u201cThe price and availability of cotton may fluctuate substantially, depending on a variety of factors\u2026 Any and all of these factors may be exacerbated by global climate change.\u201d<a href=\"#_ftn5\" name=\"_ftnref5\">[5]<\/a><\/p>\n<p><strong>How will climate change impact the global cotton market?<\/strong><\/p>\n<p>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:<\/p>\n<ul>\n<li>In China&#8217;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.<\/li>\n<li>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.<\/li>\n<li>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.<\/li>\n<li>Pakistan\u2019s production will likely suffer the most from climate change due to reduced flow to the Indus River.<a href=\"#_ftn6\" name=\"_ftnref6\">[6]<\/a><\/li>\n<\/ul>\n<p>Combining a likelihood for production volatility with relatively inelastic short- to medium-term demand, Levi\u2019s will have to contend with the possibility of\u00a0massive seasonal price hikes and supply shortages.<\/p>\n<p><strong>Levi\u2019s Options for the Future<\/strong><\/p>\n<p>Despite being exposed to cotton price and availability risk, Levi\u2019s has five options to reduce that risk.<\/p>\n<p><strong><em>First<\/em><\/strong>, Levi\u2019s can hope that endogenous crop science innovations, like Indigo Agriculture\u2019s Indigo Cotton, will substantially mitigate the impact of climate-related shocks on cotton production. Perhaps possible, but not an assumption to rest one\u2019s business model upon.<\/p>\n<p><strong><em>Second<\/em><\/strong>, Levi\u2019s can raise prices, creating a margin buffer. As quoted before, Levi\u2019s has already done this. However, significantly higher prices will push existing customers to other, lower-priced brands in this competitive industry.<\/p>\n<p><strong><em>Third<\/em><\/strong>, Levi\u2019s can push commodity risk downstream: Levi\u2019s 10-K suggests that their supplier pricing is dependent only in part on raw materials pricing,<a href=\"#_ftn7\" name=\"_ftnref7\">[7]<\/a>\u00a0which means they may lock-in seasonal pricing with their suppliers. Risk pushed to suppliers is still tangible for Levi\u2019s.<\/p>\n<p><strong><em>Fourth<\/em><\/strong>, Levi\u2019s can explore non-cotton materials for its clothing lines. In fact, Levi\u2019s Performance Stretch Jeans include 3% polyester and 2% elastane.<a href=\"#_ftn8\" name=\"_ftnref8\">[8]<\/a>\u00a0These boundaries could be pushed further, as American Eagle\u2019s Extreme Flex jeans are made with a mix of cotton, 9% polyester, and 2% elastane.<a href=\"#_ftn9\" name=\"_ftnref9\">[9]<\/a><\/p>\n<p>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.<\/p>\n<p><strong><em>Fifth<\/em><\/strong>, Levi\u2019s can invest in cotton recycling technologies. Using recycled, instead of virgin, cotton would shield Levi&#8217;s from commodity price spikes.\u00a0Traditional cotton recycling uses mechanical shredders that shorten the cotton fibers\u2019 staple lengths \u2013 in essence, lowering the quality of the cotton. According to QZ, Levi\u2019s can use a maximum of 20% traditional recycled cotton in a garment before it no longer meets quality standards.<a href=\"#_ftn10\" name=\"_ftnref10\">[10]<\/a><\/p>\n<p>To combat this issue, a few startups are developing technologies that can chemically recycle cotton without decreasing staple lengths. Levi\u2019s has developed a partnership with Evrnu, one of those startups, in which they\u2019ve developed a prototype pair of jeans made from a higher percentage of recycled cotton.<a href=\"#_ftn11\" name=\"_ftnref11\">[11]<\/a><\/p>\n<p>(Word count: 725)<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a>\u00a0<a href=\"http:\/\/www.levi.com\/US\/en_US\/about\/our-products\">Levi&#8217;s website<\/a><\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> <a href=\"http:\/\/levistrauss.com\/wp-content\/uploads\/2014\/02\/levistrauss-annualreport-2011.pdf\">Levi\u2019s Annual Report, 2011<\/a>. P15.<\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> \u201cPrice Volatility in Food and Agricultural Markets: Policy Responses.\u201d FAO et al. 2 June 2011. Page 11.<\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> <a href=\"http:\/\/levistrauss.com\/wp-content\/uploads\/2014\/02\/levistrauss-annualreport-2011.pdf\">Levi\u2019s 10-K, 2011.<\/a> P5<\/p>\n<p><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> <a href=\"http:\/\/levistrauss.com\/wp-content\/uploads\/2014\/02\/levistrauss-annualreport-2011.pdf\">Ibid<\/a>, p9<\/p>\n<p><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a>\u00a0&#8220;Cotton and Climate Change: Impacts and Options to Mitigate and Adapt.\u201d International Trade Centre Technical Paper. 2011.<\/p>\n<p><a href=\"#_ftnref7\" name=\"_ftn7\">[7]<\/a>\u00a0<a href=\"http:\/\/levistrauss.com\/wp-content\/uploads\/2014\/02\/levistrauss-annualreport-2011.pdf\">Levi&#8217;s 10-K, 2011.<\/a> Page 9<\/p>\n<p><a href=\"#_ftnref8\" name=\"_ftn8\">[8]<\/a>\u00a0<a href=\"http:\/\/www.levi.com\/US\/en_US\/mens-jeans\/p\/005140734\">Levi&#8217;s Website<\/a><\/p>\n<p><a href=\"#_ftnref9\" name=\"_ftn9\">[9]<\/a>\u00a0<a href=\"https:\/\/www.ae.com\/men-aeo-extreme-flex-slim-straight-jean-dark-rinse\/web\/s-prod\/0116_3762_534?cm=sUS-cUSD&amp;catId=cat5180058&amp;cid=AE_PLA_3370156&amp;ip=off&amp;pup_e=1&amp;pup_ptid=163445692162&amp;pup_kw=&amp;pup_c=pla&amp;pup_cid=16964&amp;pup_id=0116-3762-534-3236&amp;gclid=CjwKEAjw-uDABRDPz4-0tp6T6lMSJADNoyPbbfUVr-bjAFiOX3bG8lUCUNhkiNjVyo178EvxFyhluhoCUDjw_wcB&amp;gclsrc=aw.ds\">American Eagle Website<\/a><\/p>\n<p><a href=\"#_ftnref10\" name=\"_ftn10\">[10]<\/a>\u00a0&#8220;Why Cotton is so Difficult to Recycle and How Clothing Retailers Hope to Change That.&#8221; <a href=\"http:\/\/qz.com\/487423\/why-cotton-is-so-difficult-to-recycle-and-how-clothing-retailers-hope-to-change-that\/\">Article link.<\/a><\/p>\n<p><a href=\"#_ftnref11\" name=\"_ftn11\">[11]<\/a>\u00a0<a href=\"http:\/\/www.levistrauss.com\/unzipped-blog\/2016\/05\/levi-strauss-co-evrnu-create-first-pair-of-jeans-from-post-consumer-cotton-waste\/\">Levi&#8217;s Press Release<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When 95% of your product line is made from one agricultural commodity, climate change is a big deal.<\/p>\n","protected":false},"author":2018,"featured_media":9105,"comment_status":"open","ping_status":"closed","template":"","categories":[1419,1418],"class_list":["post-9104","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-cotton","category-levi-strauss"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/climate-change-challenge-2016\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - 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