NEW YORK—Cotton prices fell to a nearly five-year low on Monday after a Chinese official said the country will sharply curtail its cotton imports next year.
In a press briefing, an official with a state economic planning committee said Chinese textile mills will receive quotas to import the equivalent of 4.1 million 480-pound bales in 2015, the minimum allowed under rules set by the World Trade Organization. U.S. government forecasters recently predicted Chinese mills would import eight million bales in the year that began Aug. 1.
China is the world's top cotton consumer, and the official's comments sent prices tumbling.
Cotton for delivery in December ended down 2.8% at 62.59 cents a pound, the lowest since Oct. 7, 2009.
Futures prices have tumbled 26% this year on expectations that China would curb its imports.
The country had been stockpiling cotton since late 2011 following a sharp run-up in prices. But that level of buying was widely seen as unsustainable, particularly as China's economy has cooled.
August cotton imports were down 26% from a year earlier, according to customs data. On Monday, China's finance minister said major changes to the country's economic stimulus efforts aren't likely, even as the world's second-largest economy grapples with slowing growth.
The lower import target "adds a little more fundamental fuel to the argument that prices are likely to taper further," said Gary Raines, chief fiber and textile economist at INTL FCStone in Nashville, Tenn.
Also adding pressure to prices are expectations for a much bigger crop in the U.S., the world's No. 1 cotton exporter. The U.S. Department of Agriculture estimates that domestic cotton production will increase 28% in 2014 from a year earlier, as low grain prices caused farmers to switch to growing the fiber.
Some cotton traders are worried the steep drop in prices could lead to contract defaults. After prices plunged from a post-Civil War high three years ago, a wave of defaults by mills hit balance sheets at some of the largest cotton traders, sparking a wave of legal battles.
Others expect the impact of the Chinese announcement to be lessened by imports made outside the quota system. The quota allows mills to import a limited amount of cotton tax free, but many are likely to buy additional cotton if supplies are tight.
The most actively traded cotton contract on the Zhengzhou Commodity Exchange ended Monday at a 53% premium to the benchmark price on ICE Futures U.S., reflecting how little cotton is actually available to mills within China. Much of the cotton in the country's stockpiles is of a lower quality than imported U.S. cotton, analysts say.
To avoid the tax, mills could also buy cotton pre-spun into yarn outside China. That would potentially boost demand from importers in other countries, such as Vietnam and Pakistan, analysts say.
"They've already found a way to circumvent the system," said Sharon Johnson, senior cotton specialist and introducing broker at KCG Futures in Atlanta.
