The combination of a record cotton crop and falling consumption will expand global stockpiles by the most since 2005, driving further declines in the price of this year’s worst-performing commodity.

Harvests will increase 7.5 percent to 123.89 million 480-pound bales (27 million metric tons) in the 12 months ending in July, as demand drops to a three-year low of 114.27 million bales, the U.S. Department of Agriculture estimates. Prices may decline 15 percent to 77 cents a pound on ICE Futures U.S. in New York by the end of next year, from 90.91 cents now, based on the median of 12 analyst estimates compiled by Bloomberg.

“It’s a double whammy,” said James Dailey, who manages $215 million of assets at TEAM Financial Management LLC in Harrisburg, Pennsylvania. “Cotton is facing the worst-case nightmare for a commodity, where you have a glut in physical production combined with weakening demand.” Cotton fell 59 percent since reaching an all-time high of $2.197 in March as investors bet that prices would curb demand and encourage supply. Output is rising from Australia to China to India, more than compensating for a U.S. decline caused by the worst crop conditions since the dust bowl era of the 1930s. Speculators in U.S. futures are now the least bullish in 2-1/2 years, Commodity Futures Trading Commission data show.

Economic growth is forecast by the International Monetary Fund to slow next year from Europe to China to the Middle East, potentially curbing the consumption of commodities. Clothing manufacturers including Levi Strauss & Co. are already starting to cut prices to stimulate demand.

Index of Equities

This year’s 37 percent decline in prices means cotton fell the most among 24 commodities in the Standard & Poor’s GSCI gauge, which advanced 4.1 percent. The fiber rose the most in 2010, adding 92 percent. The MSCI All-Country World Index of equities dropped 9.1 percent since the end of December and Treasuries returned 9.1 percent, a Bank of America Corp. index shows.

Cotton will reach 85 cents in six months, Goldman Sachs Group Inc. said in a report Nov. 10, reducing its previous forecast of $1. The most widely held option on futures gives holders the right to sell at 90 cents by Feb. 10, according to ICE Futures U.S. data.

Hedge funds and other speculators are holding a net-long position, or bets on higher prices, of 11,985 futures and options, the least since April 2009, CFTC data show. They have been reducing their position since a peak of 81,336 contracts in September 2010.

Water Supply

China’s harvest, the biggest of any nation, is expanding for the first time in four years, the USDA estimates. Output in Australia may rise as much as 25 percent to a record as water supply improves, Adam Kay, chief executive officer of Cotton Australia, a Mascot, New South Wales-based producer’s group, said in an interview Nov. 16. Exports from India, the second-biggest shipper, may climb 14 percent, B.A. Patel, the country’s joint textiles commissioner, told reporters Nov. 15.

The USDA cut its global demand forecast five times in the past six months, on expectations that global growth is slowing. Consumption contracted more than 11 percent in 2009, the most in at least a half century, during the worst global slump since the Great Depression.

Economists don’t expect a repeat next year, with theInternational Monetary Fund predicting global growth of 4 percent, unchanged from 2011. China, the biggest cotton consumer, will expand 9 percent, and India, the second-largest, 7.5 percent, the Washington-based group estimates.

‘Turbo Boost’

The price slump since March may spur purchases by textile makers after signs of improving consumer demand. U.S. retail sales jumped to a record $52.4 billion during the four-day Thanksgiving weekend through Nov. 27, according to the National Retail Federation. More than 51 percent of shoppers bought clothes, the Washington-based NRF said.

“Mill demand must, at some point in time, catch up with retail demand,” said O.A. Cleveland, an agricultural economist and a professor emeritus in agricultural economics atMississippi State University. “It would be a turbo boost for prices if we see Chinese mills spinning more cotton because it means there’s actual demand.”

China may be accelerating purchases to rebuild reserves depleted this year by state sales aimed at containing inflation. Imports reached a six-month high of 250,000 tons in September and remained there in October, customs data show.

Nine Months

The gains in Chinese imports may not last. Production of fabric in the nation fell 4.9 percent in September from a year earlier and declined in eight of the past nine months, INTL FCStone Inc. said in a report Nov. 8. Cotton-cloth exports dropped 10.1 percent in September, a sign fabric production may remain weaker into 2012, the New York-based trader and adviser wrote in the report.

China will use 1.1 percent less cotton in the season ending in July, Cotlook Ltd. said in a Nov. 17 report. The Birkenhead, England-based research company also cut its demand forecasts for the Indian subcontinent and Brazil and anticipates a “massive”3.56 million-ton supply surplus, compared with 653,000 tons in the previous year. Expectations that declining prices would spur demand “have steadily faded,” Cotlook said.

Cheaper cotton will help clothing manufacturers, who contended this year with prices that averaged $1.365 a pound, the most since at least 1958. Levi Strauss cut prices in the third quarter to reduce inventory, Chief Financial Officer Blake Jorgensen said in October. The San Francisco-based company had raised prices in the past year in response to the surge in cotton, and shoppers balked at the higher costs, he said.

‘Cotton-Price Hangover’

“There’s a cotton-price hangover that’s going to be with us for a long time,” said Rogers Varner Jr., the president of Varner Bros., a brokerage in Cleveland, Mississippi. “The price increase earlier this year was so extreme. It was more than just turmoil. It was upheaval.”

Liz Claiborne Inc., the operator of the Juicy Couture and Kate Spade clothing lines, is still suffering from the surge in cotton, Chief Financial Officer Andrew Warren said on a conference call Nov. 9. The New York-based company’s 2012 margins will be boosted after the slump in prices, Warren said.

“Historically, cotton wants to be between 50 cents and 80 cents, and that just seems to be the fair value for it,” saidMichael Smith, the president of T&K Futures & Options in Port St. Lucie, Florida. “Cotton ran up more than other commodities, and so it still has a lot more correcting to do.”