California Apparel News

Cotton prices are down after seven consecutive months of increases, but how long that will last and for what reasons are still anybody’s guess. There are several developing factors that could push prices—and production—up or down.

At the beginning of the year, hopes were high for a cotton bounty next year. Early estimates called for a domestic cotton harvest that would eclipse the 2010/2011 crop year. According to the “Annual Economic Outlook for Cotton” report from the National Cotton Council, farmers reported planting 12.5 million acres of cotton for 2011—up 14 percent from 2010. At the same time, the international crop harvest promised to be record-breaking. And, in a marked departure from previous seasons, production of cotton around the globe is expected to outstrip consumption in 2011/2012.

Some of that rosy outlook has been tempered with reality.

Now, the U.S. Department of Agriculture is estimating the country’s cotton crop will shrink by 0.6 percent from 18.1 million bales in 2010/2011 to an even 18 million bales this year. Demand is down internationally, and in Texas, a drought is expected to cost cotton farmers $1.2 billion in losses, according to some analysts. Abroad, factors such as extreme weather, political maneuvers and stockpiling of cotton all have the potential to further affect cotton prices.

“It’s a slow-motion train wreck” with no end in sight, said Gary Raines, vice president of economics and analysis at FC Stone Fibers and Textiles, which provides execution and advisory services in commodities, currencies and international securities.Texas hold ’em

In Texas, which, depending on the year, grows roughly half of the United States’ cotton, hopes for a wet spring have all but evaporated, putting final domestic-production figures for the 2011/2012 crop year into question.

In April, Wally Darnielle, president and chief executive of the Plains Cotton Cooperative Association, the Lubbock, Texas–based handlers of millions of bales of domestic cotton, said Texas farmers needed rain and cotton seeds in the ground by early June if they were to have any chance to meet the forecasts for the state, which have ranged from 6.5 million to 8 million bales. “But first we have to plant the crop, produce it, harvest it and get it into the pipeline. That will take until early 2012,” he said.

His apprehension proved well-founded.

“This year [Texas] has seen one of the most extreme droughts in a long, long time—probably at least 50 years,” said Grady Martin, the PCCA’s director of sales. Between Nov. 1 and May 24, the Lubbock area received only 1.17 inches of rain—about 17 percent the normal amount for that time, a weekly market report from the PCCA said. Because the majority of cotton in the state relies on rain and ground water to grow crops, the dry spell means more failed and abandoned crops—and less cotton, even though, as Martin pointed out, Texas farmers planted more acres this year with cotton than last year.

It has become clear that Texas will not meet analysts’ expectations. “I couldn’t put a number on it, but [the Texas cotton crop] will be much smaller than projected previously,” Martin said.

The effect of the Texas drought on the country’s total production could be big. “Traders say the difference between rain and the lack thereof could easily mean a swing of 2 million bales in the size of the U.S. crop,” a May 26 PCCA report said. “Some tentative estimates indicate drought could slash the Texas High Plains output by around 25 percent to 30 percent from the 2010/2011 [crop year] to 3.7 million to 4 million bales,”—down from the 5.3 million bales the area produced last year. Martin said that while the USDA had predicted the nation’s cotton output to reach 18 million bales, “it is very probable that the number could turn out to be much less, with Texas largely contributing to that decrease.”

The drought will also affect abandonment rates, Raines said, adding that there is a very good chance the rate of crop abandonment could hit record levels for the 2011/2012 year.

“The latest reading on drought in Texas paints a disconcerting picture for the outlook for abandonment in the state and could have a major bullish impact on the new-crop balance sheet,” a report from FC Stone said. The 20-year average rate of abandonment on cotton acres in Texas is 19.6 percent. At the current rate, Texas’ abandoned cotton could reach “unprecedented” levels.

According to the USDA’s March Prospective Planting Report, Texas was expected to plant 6.1 million acres—almost half of the United States’ total cotton acreage. “If Texas abandonment climbs to the 1998 record [of 42.1 percent], the state may harvest only 3.5 million acres”—or approximately 4.1 million bales—the FC Stone Report warned. Based on that premise, FC Stone estimates the total domestic cotton crop for 2011/2012 will clock in at 15 million bales—3 million bales less than the USDA had projected. “The [Intercontinental Exchange] may not have seen the last of $1.50 cotton after all,” the report concludes.

For now, the guessing game continues.

The USDA began surveys on June 1 for its June 30 planted-acreage report, but because some farmers may continue to hold out for rain and other factors, the best estimates of acres that will actually be harvested won’t be available until August, the PCCA said.The good news

Prices are volatile, but they probably won’t top the records hit earlier this year—and they’re trending down.

On May 27, cotton was trading at $1.52 per pound—down from $1.84 on April 25 and its all-time high of $2.19 on March 7, according to the Intercontinental Exchange. According to the May Monthly Economic Letter from Cotton Inc., prices for 2011/2012 delivery also declined over the past month. That’s thanks to retailers and manufacturers delaying orders for later, cheaper deliveries and reducing demand throughout the supply chain. Prices for delivery in 2011/2012 remain about 15 percent lower than prices for delivery during the 2010/2011 crop year, Cotton Inc. said.

While drought is putting a damper on the Texas crops, cotton crops in other states are faring better.

According to John Michael Riley, an economist with Mississippi State University, the 530,000 acres of cotton crops in Mississippi were minimally affected by the recent extensive flooding in the state. “The Mississippi crop is looking pretty good,” he said. Floods in the mid-South and dry conditions in the Southeast don’t pose as great a risk of the mass crop failure threatened in Texas.

Cotton, globally

While the United States is the world’s largest cotton exporter, the greater global cotton market directly affects prices. Here are some of the issues that will play a role in cotton prices going forward:

bull; International cotton production for the 2011/2012 crop year is expected to increase. The National Cotton Council’s quot;Annual Economic Outlook for Cottonquot; report estimates the world crop will grow by more than 7 million bales over the previous crop year. Cotton Inc. puts the world cotton crop for 2011/2012 at 124.7 million bales—up from 114.6 million bales in the 2010/2011 crop year.

bull; China, India, Pakistan, Central Asia and West Africa are all expected to increase their cotton acreage planted on the strength of higher prices, the NCC said.

bull; But initial projections could have been too sunny. In May, Cotton Inc. released a report that said the world cotton harvest for the 2011/2012 crop year would be about 3 million bales smaller than initially forecast in February, thanks in part to adverse weather conditions.

bull; China, the world’s largest cotton importer, has reduced its consumption in recent months, leading to a cooling of prices in April and May. But analysts say China is rumored to have plowed through its cotton reserves and could start buying up cotton to replenish it. Also, weather in China has affected crops there, increasing the possibility that the import giant will look to buy cotton from places such as India. The USDA estimates China will consume 48 million bales of cotton—up from 47 million bales in 2010/2011.

bull; India and Pakistan also have reduced consumption in recent months, but this too could be temporary. The USDA estimates that both countries will increase their cotton consumption by 500,000 bales each.

bull; In India, textile manufacturers are attempting to convince the government to ban exports of cotton yarn and raw cotton to help bring prices down.

bull; Approximately 8,000 farmers in Burkina Faso, Africa’s largest producer of cotton, are boycotting planting cotton until demands for a higher price are met.