The recent speculative surge in cotton was scaled back Monday, the spot price dropping by 3.4% to $1.9749 a pound. Crops ruined last summer in Australia and Pakistan due to weather patterns sparked cotton’s upward surge that peaked on March 7 when it reached its highest trading point in more than a century, at $2.197 in New York.
Cotton’s rally may be over. A Bloomberg survey says that cotton will drop 51% to $1 a pound by Dec. 31. However demand for the material continues to strengthen around the world, making it a still very coveted commodity.
The U.S. Department of Agriculture estimates that cotton crop output may rise 11% next year (beginning August 1), compared with a 3% gain this year.
Farmers are responding by planting more cotton. The Department of Agriculture’s Prospective Plantings report this Thursday will provide a snapshot of the U.S. crop situation. Analysts are predicting that production will increase from most of the world’s major cotton producers this year, and that the U.S. will plant more than 13 million acres of cotton this season, up from 11 million acres last year.
Global demand for cotton is strong, especially in China, where manufacturing makes up the world’s largest demand for the commodity. U.S. Cotton exports are already up nearly 40% compared to this time last year, according to Bloomberg.
As high demand persists, extreme weather patterns may offset the expectations for increased output in America’s farms. “Texas, once of the leading Cotton producing states, has experienced a severe winter drought, which has sparked some concerns that the Cotton crop could be off to a poor start unless much needed moisture returns this spring,” writes Mike Zarembski, Senior Commodity Analyst for optionsXpress in a note.
Consumers are recovering slowly from the recession, as unemployment claims begin to show a reduction in Americans out of work, suggesting that price increases at retailers that feel the effects of higher cotton prices may not be immediately absorbed by shoppers. Personal income increased slightly in February, according to a report released Monday by the Commerce Department, growing 0.3% to $38.1 billion, while disposable personal income increased at the same rate to $36 billion.
Analysts for stores that spend heavily on jeans and T-shirts like Walmart, Gap and Aeropostale have said that they expect some pressure from cotton’s high prices in the companies’ earnings reports. Shares in Gap were down 1.1% Monday at $22.31, Walmart was down 0.4% at $52.15 and Aeropostale was down 0.7% at $24.07.
