Cotton Price Unravels as Supplies Rise – WSJ

Cotton Price Unravels as Supplies Rise

Rain in Texas Is Expected to Boost Crop; Slower Global Growth Could Hurt Demand

July 27, 2014 2:07 p.m. ET

Cotton prices have retreated to the lowest level in nearly five years as investors worry that global production could overwhelm demand for the fiber.

The U.S., the world’s biggest cotton exporter, is expected to produce a large crop in the season that begins Aug. 1. But global demand is likely to fall short, especially with top importer and consumer China wrapping up a 2½-year stockpiling program. U.S. government forecasters predict the amount of cotton left over in warehouses world-wide when the next season ends will reach an all-time high of 105.7 million bales.

“That’s going to weigh heavily on world supplies,” said

John Flanagan,

president of brokerage Flanagan Trading Corp. in Fuquay Varina, N.C. “Prices are on their way down to the 50-cent level.”

Growing weather has improved. Bloomberg News

Cotton prices last traded around 50 cents a pound in April 2009. On Friday, cotton for delivery in December, the most actively traded contract on the ICE Futures U.S. exchange, fell 1.1%, to 65.35 cents a pound. It was the lowest closing price since Oct. 12, 2009, and down 3.5% for the week. The front-month contract, for October delivery, ended down 1.9%, at 65.16 cents a pound.

“We’ve had great weather and that’s got everyone on the run,” said

John Payne,

market strategist at Daniels Trading in Chicago, referring to growing conditions in Texas, the top U.S. cotton-producing state.

After years of drought, Texas has begun to see rain in cotton-growing areas. Government forecasters, citing the rainfall, recently increased their estimate for U.S. cotton output during the 2014-15 season by 10% to 16.5 million 480-pound bales, exceeding market expectations for a 4.7% upward revision to June’s estimate.

There are also concerns about weakening demand. The International Monetary Fund recently cut its global economic-growth forecast for this year to 3.4% from an April estimate of 3.7%, damping sentiment in the cotton market. Cotton prices are particularly sensitive to economic data, because demand for the fiber is tied to consumer spending on items such as apparel, bed sheets and towels.

China had been a major support for the market, quadrupling its stocks since it began a strategic purchasing program in late 2011. But that program is wrapping up, as China has had trouble unloading its massive stores of the fiber on the domestic market.

The recent drop in cotton prices could spark defaults from mills that contracted cotton at higher prices, said

Jordan Lea,

co-owner of Greenville, S.C., cotton merchant Eastern Trading Co.

After prices plunged from a post-Civil War high three years ago, a wave of defaults by mills hit balance sheets at some of the largest cotton traders, setting off a surge of legal battles, some of which are still unresolved. “It’s always the elephant in the room,” Mr. Lea said. “Anytime you get a move down like this, the risk exists.”

Fain Shaffer,

president at Infinity Trading Corp., a brokerage in Indianapolis, expects prices to slide to 60 cents a pound in the near term. “We’ve got large production and questionable demand,” he said.

—Leslie Josephs contributed to this article.

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