Vanishing Chinese cotton acres spark biggest rally bet since 2013

New York, Aug 8: China’s wall of cotton is coming down.

Once the world’s biggest grower of the crop, the country lost that crown to India in the season that just ended in July after depressed prices discouraged plantings. China’s sowings are set to drop again in the 12 months that startedonAugust1,withharvested acres poised for the lowest since US government data begin in 1960. The smaller Asian crop underscores why money managers have increased their wagers on a rally for cotton futures to the highest in three years.

Prices have rallied 21% this year, reaching a twoyear high last week on signs that the global supply overhang is starting to ebb. World inventories declined last season for the first time in six years, and the reserves will fall further this year as global harvested acres slump to the lowest in three decades, the US Department of Agriculture estimates.

“We are starting to solve the glut problem,” said Ben Ross, co-head of commodities at Cohen & Steers Capital Management in New York, which oversees $58.75 billion in assets. “The worst is over for cotton prices because we have begun to rebalance the market.”

Speculator holdings

Hedge funds and other large speculators increased their net-long holdings in cotton by 13% 76,468 to US futures and options in the week ended August 2, according to Commodity Futures Trading Commission data released three days later. That’s the highest since August 2013.

Cotton climbed 3.6% last week to 76.74 cents a pound on ICE Futures US in New York. Tightening supplies mean that futures could reach 80 cents by the end of the year, according to the average of 14 estimates in a Bloomberg survey. High prices increase the cost outlook for consumers including jeans maker Levi Strauss & Co and Carter’s, which makes children’s apparel.

China’s farmers started shunning the crop in the past few years after prices tumbledfromanall-timeof $2.197 reachedin2011,whenaTexas drought shriveled crops. Futures are still trading about 65% below the record.

“Prices are not good, and many shift to grow wheat instead,” said Li Xiuli, a farmer in Xinxiang, Henan province, who gave up growing cotton two years ago on his 13 hectares of farmland. “The reduction not only happens here, but also in the whole province.”

As Chinese output dropped, domestic prices started trading above world levels. That was a major blow, since the country is the world’s No. 1 consumer. The government responded by starting to unwind its huge stockpiles through auctions. That influx of supply can help to limit price gains. The sales could last another one to two years and could start earlier next year to help ease supply concerns from textile mills, said Xi Jin, manager of monitoring system and international cooperation with the China National Cotton Information Center. Bloomberg