Is cotton headed for a bear market?
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 will have 12.7 million metric tons in inventory by July 31, 62 percent of the global total and enough to make about 71 billion t-shirts, the U.S. Department of Agriculture estimates. The government may end its stockpiling program the following season, Macquarie Group Ltd. says. Prices will drop 8.5 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 $2.197 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 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, taking it within 2 percentage points of a bear market. That pared this year’s advance to 1.1 percent as the Standard & Poor’s GSCI gauge of 24 commodities dropped 5.9 percent. The MSCI All-Country World Index of equities gained 16 percent and the Bloomberg U.S. Treasury Bond Index lost 2.1 percent.
The China National Textile & Apparel Council said in June the government may change its reserve policy in 2014 in favor of direct subsidies to farmers instead of buying crops. The program pays farmers 20,400 yuan 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 factor in the market," said Aakash Doshi, an analyst at Citigroup Inc. in New York.