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Cotton’s Projected Deeper Decline Could Still Have Little Impact on Sourcing Costs

The global accumulation of cotton has been putting downward pressure on prices, and now that China—the world’s biggest consumer of the commodity—has said it would cut its cotton imports in 2015, experts expect the cotton glut will drive prices down further still.

Cotton prices are trading near five-year lows, closing at 64.50 cents a pound Thursday on ICE Futures U.S., and Louis Rose, founder and owner of cotton consulting firm Risk Analytics said in a Barron’s article last week that he expects futures prices to trade near $0.50 a pound by the end of the year.

China’s import demand is expected to shift considerably lower now that the nation has said it will limit import quota. The U.S. Department of Agriculture (USDA) now forecasts that China will import 7 million bales in the 2014/15 season, less than half of the 14.1 million bales of cotton it brought in last year, and less than one-third of the average in 2011/12 and 2012/13, or 22.4 million bales.

Cotton production in the U.S. is expected to increase 26 percent this year over last, to 16.3 million bales, according to the USDA. But the higher U.S. production coupled with lower demand from China means world ending stocks could reach 107.1 million bales by the end of this season, the fifth consecutive season in which remaining cotton has risen.

U.S. ending stocks, specifically, are projected to double to 4.9 million bales for the 2014/15 season compared to 2.45 million bales for 2013/14. Ending stocks are also forecast to rise in India to 13.6 million bales up from 11.3 million in the previous season.

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“This implies that both of these countries will end the season with cotton left un-sold and looking for a buyer, and anticipation of so much available cotton is a major reason why there has been so much downward pressure on prices,” Cotton Incorporated senior economist Jon Devine said.

Both U.S. and global cotton produced this year will have to fight to find a home, Devine said.

“China has represented about 40 percent of global import demand for the past decade, and the pullback will affect the world market. This is especially true since the decrease in the pull from China is occurring at the same time that production is expected to increase in exportable countries,” he said. “With large crops coming out of the U.S. (16.2 million bales, 26% bigger than last year) and India (31.0 million bales, equaling last year’s record), which are the world’s largest exporting countries, there will be a lot of exportable cotton competing for diminished import demand.”

When it comes to reducing sourcing costs, lower fiber prices should be helpful, but factors arising from labor, energy, capital and finance costs are also key drivers keeping costs flat.

“Retailers and brands have reported some pushback coming from manufacturers due to non-fiber costs, and that among non-fiber elements dyestuff costs have been a particular issue. For finished goods, rising cost pressure from non-fiber inputs, like dyes, may offset some of the benefit from lower fiber prices,” Devine said.

The decrease in cotton prices this season is built in part on the expectation of a sharp increase in available supply after the harvest is collected this fall, Devine explained. “Harvesting is accelerating in countries like the U.S. and China right now and will begin in a few months down the road in India. Since it takes a few months for the cotton being collected to be ginned and become physically available, goods for delivery in the short-term may not be derived from fiber purchased at the lower prices currently being posted in NY futures and the A Index,” he said.

U.S. farmers could delay selling to support the market, and Devine said the loan program, which affords farmers that option, could allow them more time to search for better deals from buyers. But with market prices so low, over time, warehousing charges could induce cotton stored in the loan back into the market.

Devine said, “With so much cotton becoming available this crop year, both inside and outside of China, it is difficult to imagine that the loan program could generate any upward pressure on prices. At the most, the loan program may provide limited and transitory support that possibly could slow further declines.”