The World Is About to be Flooded With Cotton

The world is about to be inundated with cotton as farmers take advantage of high prices to produce more and China floods the market with excess supply from its strategic inventory.

Global output will climb 6.9 percent in the season that starts Aug. 1, helping push stockpiles outside of China to a record, the U.S. Department of Agriculture estimates. American farmers, the biggest exporters, are forecast to have their biggest harvest in a decade, and crop increases are expected in Australia and top grower India.

Growers planted more acres after cotton futures jumped 12 percent last year, when most other crops were mired in slumps. At the same, there are no signs that China’s sales of its state inventories are slowing down. The ample supply outlook means prices are now heading for the biggest monthly loss since August. Hedge funds are backpedaling on bets on a rally, lowering their wagers for the second time in three weeks.

“The supply side should remain ample, and if we see production ramp up, cotton will see further losses,” said Lara Magnusen, a La Jolla, California-based portfolio manager for Altegris Advisors LLC, which oversees $2.43 billion. On the demand side, a recent downgrade to China’s debt has raised concern that global demand “won’t be enough” to absorb additional production.

Net-Wagers

Money managers lowered their cotton net-long position, or the difference between bets on a price increase and wagers on a decline, by 8.7 percent to 95,904 futures and options contracts in the week ended May 23, according to U.S. Commodity Futures Trading Commission data released three days later. That’s the lowest in a month.

Cotton futures dropped 7.7 percent in May, settling Friday at 72.79 cents a pound on ICE Futures U.S. in New York. Prices are headed for the first monthly loss since December.

While the USDA projects that the market will post a third straight, albeit smaller, deficit in the 2017-2018 season, researcher Cotlook Ltd. is forecasting a surplus. The Birkenhead, England-based company estimates production will top demand by 44,000 metric tons.

Favorable weather has aided U.S. spring seeding, especially in Texas, the top grower. Through May 21, American farmers had sown 52 percent of intended plantings, up from 45 percent a year earlier.

India, Australia

Output is also looking favorable in India, the biggest global producer. In Australia and Brazil, increased mechanization is aiding production and allowing farmers to compete with the U.S. on quality.

China continues to unload inventories to supply the domestic market, dimming the demand outlook in the No. 1 consumer. At an auction on Friday, the nation sold 13,700 tons out of 29,500 tons offered, according to the website of state-owned China National Cotton Information Center.

“People used to say that because so much of the world inventory was within China, that it was bullish, because it was never going to come out,” said Gillian Rutherford, who helps oversee about $12 billion as a commodities portfolio manager for Pacific Investment Management Co. in Newport Beach, California. “Now, we are in the reverse situation.”

Still, farmers will have to “navigate the summer” growing season in the U.S., and adverse weather can throw off production estimates, Rutherford said.

Some cotton fields in the U.S. Southeast, including Georgia and Florida, are stressed from lack of rain and will turn dry again in the next two weeks, said Drew Lerner, president of World Weather Inc. In India’s northern growing region, where planting is underway, plants are benefiting from adequate moisture and crop prospects are “very good,’’ whereas China’s non-irrigated crops in northern areas are stressed from dryness and high temperatures, he said.

China can also still surprise the market if it decides to increase its import quotas for mills in need of higher-grade cotton after “good demand” seen during the auctions recently, Jon Devine, chief economist for Cary, North Carolina-based researcher Cotton Inc., said in an interview at Bloomberg headquarters in New York. The majority of the company’s clients include cotton growers and textile importers.