Surge in cotton production drops record prices

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Consumers fretting about rising prices for food, gas and even coffee might get a break on at least one purchase - clothing.

After hitting a record high this month, the price of cotton has been falling steadily and is expected to continue declining for the rest of the year. That should translate into lower or at least steady prices for jeans, T-shirts, underwear, socks and just about anything else made of cotton.

The price of the nearest cotton contract on the IntercontinentalExchange, or ICE, in New York fell 3 per cent Monday to $1.97 (U.S.) a pound. The price had risen as high as $2.19 a pound on March 1, more than double where it was last summer. Before the recent run-up, the 10-year average for cotton was around 60 cents a pound.

One of the main reasons for the sudden price drop is basic economics. The surge in price has prompted farmers around the world to plant more cotton this year than ever.

World cotton production is expected to increase by 14 per cent this year, after three consecutive years of decline, according to a recent report by the International Cotton Advisory Committee, a trade group that represents world cotton producers. Production will jump another 11 per cent next year to a record 28 million tons, the organization added. Farmers in the United States, the world's largest cotton exporter, are expected to boost their production by roughly 7 per cent, according to a report last month by the U.S. Department of Agriculture.

Those figures could go even higher. The USDA will release two key planting outlook reports Thursday and many investors are expecting a jump in figures for cotton. So much so that investors believe hedge funds have loaded up on short positions in cotton futures on the expectation the price will fall.

A recent survey of farmers, brokers and analysts by Thomson Reuters showed they expect cotton plantings to be 20 per cent higher in the U.S. this year than in 2010. That would produce the largest cotton crop in five years. Another survey of 14 analysts by Bloomberg News forecast the price of cotton to fall by roughly 50 per cent this year, to about $1 a pound.

"You've just got people very wary of the plantings number," Mike Stevens, an independent cotton analyst in Louisiana, told Reuters.

The soaring production marks a sharp reversal for cotton, which has been in short supply because of bad weather and poor crops in countries like China, the world's biggest producer. Supply shortfalls along with increased speculation by investment funds, helped drive prices up sharply last fall. As a result, dozens of clothing companies, including Nike Inc., adidas AG, VF Corp. and HanesBrands Inc., announced increases in their prices by as much as 30 per cent on some products.

"In 2011, VF's overall product cost will be up roughly 7 per cent driven primarily by the well-documented and unprecedented increase in cotton prices," Bob Shearer, VF's chief financial officer, told analysts on a conference call last month. VF makes Wrangler and Lee Jeans, and Mr. Shearer said product costs for some jeans would rise by as much as 15 per cent.

Prices climbed so high companies were turning to cotton alternatives such as polyester and rayon. Hanes, makers of T-shirts and underwear, was even turning to a product made from flax.

Falling cotton prices should help reverse some of those price hikes, VF and other companies have said.

But not all the news is good. Even at $1 a pound, cotton prices would be well above historic averages. And China is buying up huge amounts of cotton. It already buys about 40 per cent of global cotton, and that figure is expected to rise to 45 per cent in 10 years. That booming demand will keep cotton prices buoyed.

An increase in cotton production also means farmers will be planting less by way of food crops. Analysts already expect farmers in the U.S. to grow less rice and more cotton, corn and soybean to take advantage of high prices for those crops. Farmers elsewhere may grow less soybeans, wheat or corn. That could push up the price of many foodstuffs, which are already near record levels.