By Gregory Meyer in New York
The cotton market has unravelled, leading agricultural commodities downward as prices decline in the face of record global stocks.
ICE cotton futures have declined by 26.6 per cent since June 1 – and cotton has fallen in 2014 more than any other agricultural component of the S&P GSCI commodity index.
The dramatic drop has coincided with upgraded harvest forecasts for the US, the worldΆs biggest exporter of cotton bales.
Uncertainty over cotton policies in China, the largest cotton producer and consumer, has also depressed prices.
The lowest cotton price since 2009 is good news for clothiers with childrenΆs apparel seller CarterΆs and Hanesbrands , a maker of T-shirts and underwear, both eyeing better profit margins in recent analyst calls.
But it will cut incomes of farmers. “The growers are very unhappy,” said Peter Egli, risk manager at Plexus Cotton, a merchant. “They wanted to hedge on a bounce but they never got a bounce.”
ICE October cotton was 63.33 cents per lb on Tuesday, flat on the day. Cotton prices started the year at 85 cents per lb.
Last week, the US Department of Agriculture raised its estimate of the coming domestic harvest by 6 per cent to 17.5m bales. A standard US bale weighs 480lb.
The main factor behind the increased forecast was rain in drought-stricken Texas, the biggest source of US cotton.
The USDA projects the stateΆs farmers will be able to harvest cotton on 5.4m acres, up from 3.1m last year.
Some of these farmers were caught off guard by the rains and had not locked in forward sale prices in the futures market.
This led to a flurry of selling last month that pushed prices lower, analysts said.
Farmers are now taking out government loans ahead of the harvest to store cotton instead of selling it, in hopes that prices will rise.
This could be a gamble as the USDA projects global cotton stocks are to hit a record 105.1m bales, more than double the levels of five years ago.
China, which manages a large government cotton reserve, will hold the majority of world stocks with its own record of 62.4m bales, the USDA said.
The direction of ChinaΆs cotton policy looms large over the market. The government has been selling off some of its reserve but the offered price has been too high to significantly reduce inventories.
As cotton becomes cheaper, it has converged towards the price of polyester. The International Cotton Advisory Committee estimates consumption will increase 5 per cent this year as a result
