Record cotton crops from India to Brazil are exceeding demand by the most in more than two decades, driving prices lower for Gap Inc. and Abercrombie & Fitch Co.

Farmers will reap 123.6 million 480-pound bales in the 12 months ending in July, exceeding demand by 15 million bales and expanding stockpiles by 32 percent to the second-biggest on record, the U.S. government estimates. Futures will extend this yearΆs 4.2 percent retreat in New York by a further 15 percent to 75 cents a pound by Dec. 31, according to the median of 15 analyst estimates compiled by Bloomberg.

Prices rose to $2.197 a year ago after cold weather and floods from China to Pakistan ruined crops, the highest since America was recovering from the Civil War more than a century earlier. Farmers worldwide planted more acres, creating a glut that the International Cotton Advisory Committee in Washington says may increase by a further 12 percent next season.

“Cotton is a cub right now and can grow into a fully- fledged bear,” said Sterling Smith from St. Paul, Minnesota- based Country Hedging Inc., a unit of CHS Inc., the largest U.S. farmer-owned co-operative. “WeΆre going to have exceptional production next season, and that will weigh on prices significantly.”

Hedge Funds

Prices tumbled 56 percent to 87.9 cents on the ICE Futures U.S. exchange in the past 12 months, making it the worst performer in the Standard & PoorΆs GSCI gauge of 24 raw materials. That measure was little changed, while the MSCI All- Country World Index of equities fell 1.4 percent. Treasuries returned 6.8 percent in the past year, a Bank of America Corp. index shows.

Hedge funds are the most bearish in three years, widening their net-short position, or bets on lower prices, by 63 percent to 9,628 futures and options in the week ended March 13, Commodity Futures Trading Commission data show. Speculators were bullish every week last year as U.S. farmers faced the worst crop conditions since the dust bowl era of the 1930s. Harvests expanded fast enough in other countries to more than compensate for the 13 percent drop in U.S. output.

The 6.1 percent gain in global production predicted by the U.S. Department of Agriculture will combine with a 5.2 percent drop in demand, the biggest slump since the global recession. The ratio of stockpiles to consumption will rise to 60 percent, the most since 1999, at the end of the next season which begins in August, according to ICAC, a group of producing and consuming countries founded seven decades ago.

Abercrombie & Fitch

Gap, the largest U.S. apparel chain, told investors in February it expected lower costs in the second half. Abercrombie & Fitch (ANF), the operator of its namesake and Hollister teen- clothing stores, told analysts on March 7 it will benefit from declining prices.

Demand is weakening amid slowing global growth. The world economy will expand 3.3 percent this year, from 3.8 percent in 2011, the International Monetary Fund has said. Chinese Premier Wen Jiabao announced an annual growth target of 7.5 percent on March 5, the lowest since 2004. Japan contracted 0.7 percent in the fourth quarter and the 17-nation euro regionΆs economy shrank 0.3 percent, government data show.

China, which uses about 40 percent of the worldΆs cotton, will import 18.5 million bales this season, the most in six years and 54 percent more than a year earlier, the USDA estimates. Shipments are rising as the government diverts domestic supplies to state reserves that may represent 25 percent of global stockpiles by July, according to ICAC.

Million Bales

India, the second-biggest exporter after the U.S., may also slow sales after the government said it isnΆt accepting new export registrations after partially lifting a ban March 12. The nation already shipped about 9.5 million 170-kilogram bales this season, more than the 8.4 million-bale surplus forecast by the government. Prices jumped 4.5 percent in New York on March 5 after the Commerce Ministry announced a halt to sales.

Declining prices and the curbs on exports may also encourage IndiaΆs farmers to sow less cotton in the planting season that begins next month. The area given over to the crop will decline 6 percent from a record 12.19 million hectares (30.1 million acres) a year earlier, ICAC estimates.

Consumption may exceed estimates because there are signs that growth is accelerating in some economies. Claims for U.S. jobless benefits fell to match a four-year low and consumer confidence rose to the highest level since 2008, government figures and data compiled by Bloomberg showed March 15. Retail sales advanced the most in five months in February, Commerce Department data on March 13 showed.

Chinese Inflation

Inflation (CNCPIYOY) in China fell to a 20-month low in February, increasing expectations the government will loosen monetary policy to shore up growth. The effect on cotton may be muted because sales from official stockpiles are likely, said Peter Egli, a Chicago-based director of risk management at Plexus Cotton Ltd., which advises the industry.

“For the international market, that means that China will become very quiet after April,” Egli said. “China will not be able to remain the buyer of last resort for another season, at least not to the degree they were this season.” ICAC expects imports to drop 14 percent to 3.51 million tons next season.

Weaker Chinese demand will come at a time when U.S. production is anticipated to rebound. While farmers will plant about 7 percent fewer acres this season, improved growing conditions mean output will probably increase 32 percent, Informa Economics Inc., a research company based in Memphis, Tennessee, reported March 9.

Australian Bureau

Shipments from Australia, the third-largest exporter, may climb to a record in the next season after flooding boosted water supplies, the governmentΆs Australian Bureau of Agricultural and Resource Economics and Sciences estimates. Sales may reach 1.075 million tons in the 12 months beginning July 1, from 955,000 tons a year earlier.

Gap, (GPS) based in San Francisco, is “fairly confident that average unit costs will improve in the second half,” Chief Financial Officer Sabrina Simmons said on a conference call Feb. 23. The company, whose shares rose 41 percent this year, will report a 1.6 percent gain in profit to $846 million this year, the mean of 16 analyst estimates compiled by Bloomberg shows.

Abercrombie & Fitch, based in New Albany, Ohio, anticipates that “in the first quarter of 2013 and some degree in the second quarter, weΆll still be benefiting from the year-over- year cotton cost reduction,” Chief Financial Officer Jonathan Ramsden said on a conference call March 7. Shares of the company rose 6.7 percent this year.

“Cotton is overvalued given its fundamentals,” said Paul Deane, an agricultural economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “ItΆs going to come under pressure.”