Strong Production Means Bearish Predictions for Cotton Market
December 1, 2011 Bloomberg
The combination of a record cotton crop and falling consumption will expand global stockpiles by the most since 2005, driving further declines in the price of this year’s worst-performing commodity.
Harvests will increase 7.5 percent to 123.89 million 480- pound bales (27 million metric tons) in the 12 months ending in July, as demand drops to a three-year low of 114.27 million bales, the U.S. Department of Agriculture estimates. Prices may decline 15 percent to 77 cents a pound on ICE Futures U.S. in New York by the end of next year, from 90.91 cents now, based on the median of 12 analyst estimates compiled by Bloomberg.
“It’s a double whammy,” said James Dailey, who manages $215 million of assets at TEAM Financial Management LLC in Harrisburg, Pennsylvania. “Cotton is facing the worst-case nightmare for a commodity, where you have a glut in physical production combined with weakening demand.”
Cotton fell 59 percent since reaching an all-time high of $2.197 in March as investors bet that prices would curb demand and encourage supply. Output is rising from Australia to China to India, more than compensating for a U.S. decline caused by the worst crop conditions since the dust bowl era of the 1930s. Speculators in U.S. futures are now the least bullish in 2-1/2 years, Commodity Futures Trading Commission data show.
Economic growth is forecast by the International Monetary Fund to slow next year from Europe to China to the Middle East, potentially curbing the consumption of commodities. Clothing manufacturers including Levi Strauss & Co. are already starting to cut prices to stimulate demand.
Index of Equities
This year’s 37 percent decline in prices means cotton fell the most among 24 commodities in the Standard & Poor’s GSCI gauge, which advanced 4.1 percent. The fiber rose the most in 2010, adding 92 percent. The MSCI All-Country World Index of equities dropped 9.1 percent since the end of December and Treasuries returned 9.1 percent, a Bank of America Corp. index shows.
Cotton will reach 85 cents in six months, Goldman Sachs Group Inc. said in a report Nov. 10, reducing its previous forecast of $1. The most widely held option on futures gives holders the right to sell at 90 cents by Feb. 10, according to ICE Futures U.S. data.
Hedge funds and other speculators are holding a net-long position, or bets on higher prices, of 11,985 futures and options, the least since April 2009, CFTC data show. They have been reducing their position since a peak of 81,336 contracts in September 2010.
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