China sits on cotton stockpiles as prices wilt, glut worries grow
NEW YORK — China is hoarding a record amount of cotton to aid farmers as global production exceeds demand for a fourth-consecutive year, increasing the risk of a supply surge that would tip prices into a bear market.
The biggest producer and user is expected to have 13.9 million tons in inventory by July 31 — 62 percent of the global total and enough to make about 71 billion T-shirts, according to a September report by the U.S. Department of Agriculture.
The government may end its stockpiling program the next season, Macquarie Group Ltd. says. Prices will drop 8.4 percent to 69.5 cents a pound in a year, according to the median of 12 analyst estimates compiled by Bloomberg.
While growers in the U.S. and Brazil pared output as prices tumbled from a record $2.20 in 2011, Chinese farmers boosted production as the state absorbed excess crops. The government bought supply equal to about 85 percent of domestic output last year and the nation will import 2.2 million tons less this season, accounting for all the contraction in global shipments seen by the USDA. Cheaper cotton boosted margins for Levi Strauss & Co., Hanesbrands Inc. and other clothing companies.
“The size of the reserve is one issue, transparency is another issue, and both are contributing to anxiety in the market,” said Terry Townsend, the executive director of the International Cotton Advisory Committee in Washington. “We hope that China embarks on an orderly liquidation over a number of years so the market can reach equilibrium. Everyone is speculating on what the government will do.”
Cotton fell almost 19 percent to 75.85 cents a pound on ICE Futures U.S. in New York since reaching a 16-month closing high of 93.32 cents
on Aug. 16. That pared this year’s advance to 0.9 percent as the Standard & Poor’s GSCI gauge of 24 commodities dropped 5.6 percent.
The China National Textile & Apparel Council said in June that the government may change its reserve policy in 2014 in favor of direct subsidies to farmers instead of buying crops. The program pays farmers about $3,500 a ton for cotton, equal to about $1.52 a pound, or about twice the futures price in New York.
The nation may abandon the policy in 2014-15, said Kona Haque, an analyst at Macquarie in London. The program and China’s imports are the “most important factors in the market,” said Aakash Doshi, an analyst at Citigroup Inc. in New York.
“The program right now is economically unfeasible,” said John Flanagan, the president of Flanagan Trading Corp. in Fuquay-Varina, N.C. “They have so many bales of cotton right now, that it serves no good purpose. They can achieve the same thing by just directly subsidizing.”
China may start selling some of its reserves later this year or in 2014, Gao Fang, the secretary-general of the China Cotton Association, said at a conference in Liverpool, England, on Oct. 24, without giving figures. China sold about 4.6 million tons-from reserves in the season that ended July 31, according to Cotlook Ltd., a Birkenhead, England-based research company.
A change in China’s reserve policy “doesn’t mean dumping stocks,” said Antonio Esteve, the chief executive officer of the cotton group at Ecom Agroindustrial Corp. Ltd., a trading company based in Pully, Switzerland. Esteve said he expects an “orderly feed back to the market.”
Sales from Chinese stockpiles would come as global output drops 4.8 percent to 117.2 million bales this season, according to the USDA. The agency predicts that demand will rise 2.1 percent to 109.8 million bales. A bale weighs 480 pounds and has enough fiber to make 1,217 T-shirts, the National Cotton Council of America says. A fourth surplus would be the longest streak since 1999, according to the USDA.
Production in the U.S., the biggest exporter, will drop 26 percent to a four-year low of 13.1 million bales after some areas suffered drought conditions and farmers reduced planting, the USDA estimates. U.S. growers produced 17.3 million bales in 2012. Chinese growers also are starting to curb output, with the harvest predicted to be 7.1 percent smaller at 32.5 million bales this season.
In Arkansas, growers reduced their cotton acreage by nearly 50 percent this year — planting about 300,000 acres, largely because of low cotton prices and expectations of higher returns on soybeans. The USDA estimates the state will produce about 700,000 bales, down about 46 percent from the 1.3 million bales produced in 2012.
Cotton accounts for 31 percent of global fiber consumption and that may drop to 27 percent by 2025 as clothes makers favor cheaper products including polyester, the International Cotton Advisory Committee’s Townsend said.
Hanesbrands, the maker of Hanes underwear and Playtex bras, sees favorable cotton prices for at least the “next couple of quarters,” Chief Financial Officer Richard Moss said on a conference call with analysts Oct. 30.
Levi Strauss, the San Francisco-based maker of Levi’s jeans and Dockers apparel, reported that gross margins improved in the nine months ended Aug. 25 mainly because of cheaper cotton. Prices about 80 cents a pound should ensure adequate supply, Michael Casey, chief executive officer of Carter’s Inc., the Atlanta-based maker of OshKosh B’gosh children’s clothing, said on a conference call Oct. 24.
Global cotton stockpiles will expand 10 percent to 22.5 million tons by the end of the season in July, enough to meet more than 10 months of global demand, the USDA says. That’s the highest level of inventories relative to consumption in agency data going back more than a half century.