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U.K. food, ingredients and retail group Associated British Foods (ABF.LN) said Monday it expects a substantial rise in second-half earnings, but cautioned that it expects tighter margins at discount clothing chain Primark next year due to higher cotton prices, increases in freight costs and increased sales taxes the result of the Government's decision to increase in VAT to 20per cent in January.

 Floods in China and Pakistan have severely hit crops, pushing up wholesale prices to a 15-year high and have pushed the price of cotton to rocket up in recent weeks by more than 700 per cent. Floods have destroyed over 4.25 million acres, affecting an estimated 25per cent of the cotton crop.

 India - another major producer, alongside China, Pakistan and the United States - has compounded concerns after its textile industry called for an export ban until next year to ease supply issues.

There had been predictions of a bumper cotton crop from India this year, but reports now suggest heavy rain in both India and China could leave levels short of expectations.

Higher cotton prices have a huge bearing on the cost of clothing, with fabric accounting for around 60% to 70% of product price.

Primark have revelled in success by undercutting reputable rivals with economical throwaway fashions, including the £2 T-shirt and £4 pair of jeans for men.

However, it seems it will be impossible to repeat these deals when higher wholesale prices feed through to the high street early next year. Just last month, Next, warned that prices may rise by 8per cent next year due to higher costs, including cotton, and January’s VAT hike.

In one month, the wholesale price of one pound of cotton has increased from $0.10 to $0.83, which is its highest level for 15 years. Allen Terhaar, executive director of Cotton Council International, said: 'Cotton is 15 to 20 per cent of the textile component of what people are wearing.

'Consumption worldwide is now exceeding production and prices are going up.'

Wang Yong, an analyst at China's Hongyuan Futures exchange in Beijing, said: 'Shrinking inventories and this year's adverse weather are the main reasons behind the supply shortage.'

Higher cotton prices are expected to see retailers and manufacturers looking to switch to using more man-made fibres.

Fashion store H&M have also expressed concern over rising prices, with jeans maker Levi Strauss and Hanesbrands, which owns Wonderbra, also warning of increases. Experts say the extra costs would add about £5 to a £50 pair of jeans.

However, Debenhams has played down fears that its clothing will cost more because of cotton price rises, saying the harvest in India - the world's second biggest cotton producer - was expected to be very good.

 Chief executive Rob Templeman said: "Cotton prices are only part of the equation. Prices are up 4% and volume is down 2%. What is driving inflation is Forex (currency markets)."

He said his firm hedged against cotton price rises over a long period to avoid possible cost problems.

 Higher cotton prices could expect to see retailers and manufacturers looking to switch to using more man-made fibres.

So come January, besides paying more for cottonwear, there may be one more side effect for consumers - the comeback of polyester. Or rather, poly-cotton.