The layer of dust on Jeremy Brown’s cotton fields in West Texas is increasing the chance that Americans will start paying more for underwear or bluejeans.
The drought that parched cropland and pastures across the state since 2011 has left Brown’s farm in Dawson County looking like a desert less than a month before he will sow 1,900 acres of cotton. Brown said crop conditions “are as bad as last year,” when he abandoned 60 percent of plantings.
Crop prospects are worsening in Texas, the top grower, as inventories before this year’s harvest head for a 35 percent plunge in the U.S., the world’s biggest exporter. Futures in New York are up 22 percent from a low in November and may rally 11 percent further to $1.017 a pound by year end, a Bloomberg survey of analysts showed. Higher costs will boost pressure on cotton buyers including Hanesbrands, which already is increasing prices on some clothing.
“The stockpiles are very tight, but there are also significant concerns about extreme weather,” said Christian Wagner, the Wilmington, Del.-based chief investment officer of Longview Capital Management who oversees $250 million, including investments in cotton. “Uncertainty typically leads to higher prices.”
U.S. cotton inventories will drop to 2.53 million bales by July 31, according to the average of estimate of 11 traders and analysts surveyed by Bloomberg. That would be the lowest since the season ended in 1991.
American growers reaped 13.19 million bales during the season that ends in July, the fewest since 2011, the USDA said March 10. The government may further reduce its production outlook by 1.7 percent to 12.97 million, the Bloomberg survey showed. A bale weighs 480 pounds.
Hanesbrands, which is based in Winston-Salem, will make “mid-single-digit price increases this year in several key categories” to maintain profit margins as higher cotton costs spur “inflationary pressures,” Gerald Evans, the chief operating officer, said on a conference call with analysts on Jan. 29.
Cotton was trading at 89.02 cents a pounds on ICE Futures U.S. in New York Thursday.
In 2011, when cotton reached a record $2.197, Hanesbrands raised prices by as much as 30 percent in some categories, Chairman Richard A. Noll said on the call. While the commodity is down from that peak, it is almost double the cost in 2008, creating a more “inflationary environment” for apparel makers, Chief Financial Officer Richard Moss said on a Feb. 27 call.
An index of U.S. apparel prices has risen for three straight years, and in December was the highest to end a year since 2000, Bureau of Labor Statistics data show. The gauge is up 7.6 percent from a low in January 2009, during the recession, trailing the 11 percent gain in the broader consumer price index over the same period.
Farmers are eager to increase production after cotton rallied 7.5 percent in the past 12 months. U.S. plantings for the season that starts in August will increase 6.7 percent from a year earlier to 11.1 million acres, the USDA said March 31.
Even after the drought, Brown plans to boost acreage by 73 percent, including new land he is leasing. Only 30 percent of his fields are irrigated, so the rest need rain to survive.
Global cotton output will exceed demand for a fourth year, with world stockpiles on July 31 reaching 96.75 million bales, the USDA estimates. That’s almost double the amount held in 2011 and is enough to make about 16 t-shirts for every person on the planet, industry data show. China, the biggest consumer, will hold 57.81 million bales, five times more than in 2011.
Hedge funds and other money managers are betting on more cotton-price gains, holding a net-long position of 63,305 futures and options contracts as of April 1, U.S. government data show. The holdings rose in four of the past five weeks and have climbed 46 percent this year.