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Cotton Tumbles as China Restricts Imports

21:12PM Sep 24, 2014

Cotton prices dropped to the lowest in almost five years as China moved to limit imports, signaling an expanding global glut that’s cutting costs for T-shirts and jeans.

China, the world’s largest importer and grower, said this week it will restrict shipments for 2015. Futures tumbled 27 percent this year as rains boosted prospects for crops in the U.S., the top exporter. Lower prices can help improve profit margins for Hanesbrands Inc. and Carter’s Inc., the maker of children’s apparel that said lower cotton costs will show up in next year’s clothing line.

Slowing demand from China will leave more supplies with world inventories already at an all-time high. Global production will exceed consumption for a fifth straight year, boosting stockpiles by 6 percent to a record 106.3 million bales by July 31, 2015, according to the U.S. Department of Agriculture data.

"If they’re not going to buy cotton off the market, of course, it will put some pressure on" prices, Sid Love, an agricultural economist at Sid Love Consulting Services in Overland Park, Kansas, said in a telephone interview. "It’s going to be a slow process of probably going down until there’s an increase in demand."

Cotton for December delivery dropped 2 percent to settle at 61.57 cents a pound at 2:20 p.m. on ICE Futures U.S. in New York, after touching 61.02 cents, the lowest for a most-active contract since Oct. 5, 2009.

Hanesbrands’ Costs

Hanesbrands typically hedges its cotton position six to nine months ahead of delivery, and the decline in prices will probably be seen in the company’s balance sheet by about the second quarter of 2015, Richard Moss, the chief financial officer, said on an earnings call in July.

"The cheaper cotton that’s coming to the market now will be a benefit for goods that are going to be produced for the fall 2015 season and beyond," Michael Casey, the chief executive officer of Carter’s, told analysts on a Sept. 3 conference call. "Cotton has come down about 25 percent."

Raw cotton accounts for about 15 percent of the cost of finished goods, Casey said at the conference. Carter’s is the Atlanta-based maker of OshKosh B’gosh children’s clothing.

Global inventories before the start of this year’s harvest on Aug. 1 were already at 100.3 million bales, 12 percent higher than a year earlier and a record, according to USDA data.

Stockpiles are swelling as receding drought in Texas means American production will climb 28 percent this season, the most since 2011, the USDA predicts.

"If you put all the factors together on top of the fact we’re sitting on record-high ending stocks, it’s just a quite uncertain outlook," said Tracey Allen, an analyst at Rabobank International in London. "Lower import costs are good news for any end user."