Nov. 5 (Bloomberg) -- China is hoarding a record amount of cotton to aid farmers as global production exceeds demand for a fourth consecutive year, increasing the risk of a supply surge that would tip prices into a bear market.

The biggest producer and user will have 12.7 million metric tons in inventory by July 31, 62 percent of the global total and enough to make about 71 billion t-shirts, the U.S. Department of Agriculture estimates. The government may end its stockpiling program the following season, Macquarie Group Ltd. says. Prices will drop 8.5 percent to 69.5 cents a pound in a year, according to the median of 12 analyst estimates compiled by Bloomberg.

While growers in the U.S. and Brazil pared output as prices tumbled from a record $2.197 in 2011, Chinese farmers boosted production as the state absorbed excess crops. The government bought supply equal to about 85 percent of domestic output last year and the nation will import 2 million tons less this season, accounting for all the contraction in global shipments seen by the USDA. Cheaper cotton boosted margins for Levi Strauss & Co., Hanesbrands Inc. and other clothing companies.

“The size of the reserve is one issue, transparency is another issue, and both are contributing to anxiety in the market,” said Terry Townsend, the executive director of the International Cotton Advisory Committee in Washington. “We hope that China embarks on an orderly liquidation over a number of years so the market can reach equilibrium. Everyone is speculating on what the government will do.”

Apparel Council

Cotton fell 18.6 percent to 75.95 cents a pound yesterday on ICE Futures U.S. in New York since reaching a 16-month closing high of 93.32 cents on Aug. 16, taking it within 2 percentage point of a bear market. That pared this yearΆs advance to 1.1 percent as the Standard & PoorΆs GSCI gauge of 24 commodities dropped 5.6 percent. The MSCI All-Country World Index of equities gained 17 percent and the Bloomberg U.S. Treasury Bond Index lost 2.1 percent.

The China National Textile & Apparel Council said in June the government may change its reserve policy in 2014 in favor of direct subsidies to farmers instead of buying crops. The program pays farmers 20,400 yuan a ton for cotton, equal to about $1.52 a pound, or about twice the futures price in New York.

The nation may abandon the policy in 2014-15, said Kona Haque, an analyst at Macquarie in London. The program and ChinaΆs imports are the “most important factor in the market,” said Aakash Doshi, an analyst at Citigroup Inc. in New York.

΅Economically UnfeasibleΆ

“The program right now is economically unfeasible,” said John Flanagan, the president of Flanagan Trading Corp. in Fuquay-Varina, North Carolina. “They have so many bales of cotton right now, that it serves no good purpose. They can achieve the same thing by just directly subsidizing.”

China may start selling some of its reserves later this year or in 2014, Gao Fang, the secretary general of the China Cotton Association, told a conference in Liverpool, England, on Oct. 24, without giving figures. China sold about 4.2 million tons from reserves in the season that ended July 31, according to Cotlook Ltd., a Birkenhead, England-based research company.

A change in ChinaΆs reserve policy “doesnΆt mean dumping stocks,” said Antonio Esteve, the chief executive officer of the cotton group at Ecom Agroindustrial Corp. Ltd, a trading company based in Pully, Switzerland. Esteve said he expects an “orderly feed back to the market.”

Drought Conditions

Sales from Chinese stockpiles would come as global output drops 3 percent to 117.42 million bales (25.58 million tons) this season, according to the USDA. The agency predicts that demand will rise 2.1 percent to 108.7 million bales. A bale weighs 480 pounds and has enough fiber to make 1,217 t-shirts, the National Cotton Council of America says. A fourth surplus would be the longest streak since 1999, according to the USDA, which is scheduled to update supply and demand forecasts Nov. 8.

Production in the U.S., the biggest exporter, will drop 26 percent to a four-year low of 2.81 million tons after some areas suffered drought conditions and farmers reduced planting, the USDA estimates. Chinese growers also are starting to curb output, with the harvest predicted to be 5.7 percent smaller at 7.19 million tons this season. Output would still have almost doubled in two decades, USDA data show.

Cotton accounts for 31 percent of global fiber consumption and that may drop to 27 percent by 2025 as clothes makers favor cheaper products including polyester, the International Cotton Advisory CommitteeΆs Townsend said.

LeviΆs Jeans

Hanesbrands, the maker of Hanes underwear and Playtex bras, sees favorable cotton prices for at least the “next couple of quarters,” Chief Financial Officer Richard Moss said on a conference call with analysts Oct. 30. Shares of the Winston Salem, North Carolina-based company jumped 89 percent to $67.42 since the start of January and will climb to $74.56 in 12 months, according to the average of nine analyst forecasts.

Levi Strauss, the San Francisco-based maker of LeviΆs jeans and Dockers apparel, reported that gross margins improved in the nine months ended Aug. 25 mainly because of cheaper cotton. Prices at about 80 cents a pound should ensure adequate supply, Michael Casey, chief executive officer of CarterΆs Inc., the Atlanta-based maker of OshKosh BΆgosh childrenΆs clothing, said on a conference call Oct. 24.

Global cotton stockpiles will expand 10 percent to 20.64 million tons by the end of the season in July, enough to meet more than 10 months of global demand, the USDA says. ThatΆs the highest level of inventories relative to consumption in agency data going back more than a half century.

There are already signs that China may be amending its cotton policy. This seasonΆs buying program began Sept. 9 and purchases reached 1.08 million tons by Oct. 31, about a third less than last year, according to data from Cotlook.

“There are a lot of rumors but I donΆt think any hard facts,” said Jean-Marc Derossis, a managing director at Plexus Cotton Ltd., a Liverpool-based merchant. “First they will stop building stocks, which theyΆre probably in the process of doing. The second step is to reduce stocks.”