The rally that drove cotton prices to the highest since America was recovering from the Civil War is ending as farmers from Texas to New South Wales plant record crops and replenish stockpiles for the first time since 2007.
Cotton will drop 51% to $1 a pound by December 31, according to the median in a Bloomberg survey of 14 analysts and traders. Hedge funds are already cutting bets on higher prices by the most in three years. Output may rise 11% to 127.5 million bales in the year that starts August 1, three times faster than a 3% gain in demand to 120 million bales, the US Department of Agriculture estimates.
“We have had quite a nice run, and I don’t see it sustaining,” said John Stephenson, who helps manage more than C$2 billion ($2 billion) at First Asset Investment Management Inc. in Toronto. “More acreage will be dedicated to cotton, and in a scenario where consumers are facing higher food and fuel prices, clothing will take a back seat.”
Cotton rose to $2.197 on March 7, the highest in 140 years of trading in New York, after flooding in Australia and Pakistan and freezes in China ruined crops. Adidas AG, the second-largest sporting-goods maker, said this month that cotton was a cost threatening margins, and Wal-Mart Stores Inc. paid more for garments including jeans.
Farmers are responding by planting more cotton, which may come at the expense of corn and soyabeans, First Asset’s Stephenson said. Corn gained 79% since July 1 and soyabeans climbed 50%, driving global food costs to a record, the United Nations estimates.
While March 7 marked the peak, it’s much less than in previous decades. In 1973, cotton jumped to the highest in at least 14 years to 99 cents, the equivalent of $4.92 today, according to a calculator on the website of the Federal Reserve Bank of Minneapolis.
Cotton closed at $2.0449 on March 25, after surging 178% since mid-July, the most among the 24 commodities in the Standard & Poor’s GSCI index. The raw-materials gauge climbed 42%, the Standard & Poor’s 500 Index gained 20% and Treasuries lost 0.2%, a Bank of America Merrill Lynch index shows. Cotton lost 3.4% on Monday to $1.975 a pound. Prices could still rally to $2.30 by June because supply is so scarce and more “weather problems or other external catastrophes” could mean a high of $2.90, said John Flanagan, president of Flanagan Trading Corp. in Fuquay-Varina, North Carolina.
Demand is still strengthening. In the year ending July 31, China will use 17.5 million more bales than it grows, the USDA estimates.
While farmers will grow more cotton this year, not all of it may reach global markets. India, the second-biggest producer after China, limited cotton-yarn exports in December because of concern about domestic shortages. It eased some of those restrictions last month.