Record cotton harvest seen cutting prices

March 20 (Bloomberg) -- Record cotton crops from India to Brazil are exceeding demand by the most in more than two decades, driving prices lower for Gap Inc. and Abercrombie & Fitch Co.

Farmers will reap 123.6 million 480-pound bales in the 12 months ending in July, exceeding demand by 15 million bales and expanding stockpiles by 32% to the second-biggest on record, the U.S. government estimates. Futures will extend this year’s 3.9% retreat in New York by a further 15% to 75 cents a pound by Dec. 31, according to the median of 15 analyst estimates compiled by Bloomberg.

Prices rose to $2.197 a year ago after cold weather and floods from China to Pakistan ruined crops, the highest since America was recovering from the Civil War more than a century earlier. Farmers worldwide planted more acres, creating a glut that the International Cotton Advisory Committee in Washington says may increase by a further 12% next season.

“Cotton is a cub right now and can grow into a fully- fledged bear,” said Sterling Smith from St. Paul, Minnesota- based Country Hedging Inc., a unit of CHS Inc., the largest U.S. farmer-owned co-operative. “We’re going to have exceptional production next season, and that will weigh on prices significantly.”

Hedge Funds

Prices tumbled 56% to 88.2 cents on the ICE Futures U.S. exchange in the past 12 months, making it the worst performer in the Standard & Poor’s GSCI gauge of 24 raw materials. That measure was down 1.3%, while the MSCI All-Country World Index of equities fell 0.9%. Treasuries returned 6.8% in the past year, a Bank of America Corp. index shows.

Hedge funds are the most bearish in three years, widening their net-short position, or bets on lower prices, by 63% to 9,628 futures and options in the week ended March 13, Commodity Futures Trading Commission data show. Speculators were bullish every week last year as U.S. farmers faced the worst crop conditions since the dust bowl era of the 1930s. Harvests expanded fast enough in other countries to more than compensate for the 13% drop in U.S. output.

The 6.1% gain in global production predicted by the U.S. Department of Agriculture will combine with a 5.2% drop in demand, the biggest slump since the global recession. The ratio of stockpiles to consumption will rise to 60%, the most since 1999, at the end of the next season which begins in August, according to ICAC, a group of producing and consuming countries founded seven decades ago.

Abercrombie & Fitch

Gap, the largest U.S. apparel chain, told investors in February it expected lower costs in the second half. Abercrombie & Fitch, the operator of its namesake and Hollister teen- clothing stores, told analysts on March 7 it will benefit from declining prices.

Demand is weakening amid slowing global growth. The world economy will expand 3.3% this year, from 3.8% in 2011, the International Monetary Fund has said. Chinese Premier Wen Jiabao announced an annual growth target of 7.5% on March 5, the lowest since 2004. Japan contracted 0.7% in the fourth quarter and the 17-nation euro region’s economy shrank 0.3%, government data show.

China, which uses about 40% of the world’s cotton, will import 18.5 million bales this season, the most in six years and 54% more than a year earlier, the USDA estimates. Shipments are rising as the government diverts domestic supplies to state reserves that may represent 25% of global stockpiles by July, according to ICAC.

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