Cotton Glut Expands to Record as Hanes Profit Gains

Cotton Glut Expands to Record as Hanes Profit Gains: Commodities

The fourth straight year of surplus cotton output and the biggest drop in Chinese imports since 2000 are creating record global inventories, signaling higher profits for the makers of Hanes underwear.

Stockpiles will jump 8.6 percent to 93.765 million bales in the 12 months ending in July, the U.S. Department of Agriculture said in an Aug. 12 report. There are enough inventories to make three pairs of jeans for every person in the world and reserves doubled since reaching a 13-year low in 2010. Prices may fall 8.5 percent to 76.6 cents a pound by the end of 2013, according to the average of 16 analyst estimates compiled by Bloomberg.China, which uses about a third of the world’s cotton, will reduce imports by 46 percent, or 9.33 million bales, from last year as it focuses on supporting local producers. It is accumulating the biggest stockpiles ever after the government bought supply to aid farmers as economic growth slowed. The USDA’s prediction for Chinese imports is about twice the drop it expects in global output, at a time when crops are improving across the U.S., India, Brazil and Australia.

“We expect weak Chinese demand and high global production to continue weighing on prices,” said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, which oversees about $1.3 trillion of assets. “The Chinese economy is slowing and export growth has been weaker than we expected for textile mills and other manufacturers.”

Demand Expands

Cotton rose 11 percent to 83.75 cents on ICE Futures U.S. in New York this year as improving yields reduced concern about drought that had driven prices as much as 25 percent higher. The Standard & Poor’s GSCI Spot Index of 24 commodities advanced 3.4 percent since the end of December, and the MSCI All-Country World Index of equities added 7.4 percent. The Bloomberg Treasury Bond Index lost 3.1 percent.

Global production will drop 3.9 percent to 116.38 million bales in the 12 months that began Aug. 1 as demand expands 2.3 percent to 109.85 million bales, the USDA says. A bale weighs 480 pounds (218 kilograms). China’s stockpiles will surge 16 percent to 58.26 million bales, more than five times what it held in 2011 and 62 percent of estimated world inventory.

The glut emerged after prices almost doubled in 2010 and reached an all-time high of $2.197 in March 2011. Production expanded to a record 125.14 million bales the following year. Demand fell 11 percent since peaking in 2007 as the global recession curbed sales of clothing, bedding and textiles.

Lower Costs

“The market cannot ignore the fact that huge stocks exist,” said Jordan Lea, the chairman of Eastern Trading Co., an exporter in Greenville, South Carolina. The inventories “will come to the market at some time, at some price,” he said. “That is how they will threaten a rally.”

Hanesbrands Inc., the Winston Salem, North Carolina-based maker of Hanes underwear and Playtex bras, said July 30 that its cotton costs dropped 49 percent in the second quarter. The company raised its full-year earnings-per-share forecast to $3.50 to $3.65, from $3.25 to $3.40.

Net income at Levi Strauss & Co., the San Francisco-based maker of Levi’s jeans and Dockers apparel, more than tripled to $48 million in the second quarter, “mainly due to lower cotton costs,” along with higher sales and more-profitable products, Chief Financial Officer Harmit J. Singh said on a July 9 conference call.

China Buying

The predicted drop in prices may be curbed by China, where the government plans to buy from farmers for a third year. The program runs from September through March 2014 and pays 20,400 yuan ($3,333) a metric ton, the China Cotton Association said in April. That’s about $1.51 a pound, or 80 percent more than New York futures. While the government may halt purchases in favor of direct subsidies to farmers, that won’t occur until at least the middle of next year, Robert Yang, assistant president of the China National Textile & Apparel Council, said June 28.

China’s imports, which accounted for 43 percent of global purchases last year, fell 21 percent in the first seven months to 2.74 million tons, from 3.46 million a year earlier, customs data show.

Hedge funds and other large speculators more than doubled their net-long position, or bets on higher prices, since early June and are the most bullish since the U.S. government began tracking the data in 2006. Long positions outnumbered shorts by 82,715 futures and options contracts as of Aug. 20, U.S. Commodity Futures Trading Commission data show. A contract represents 50,000 pounds.

Texas Drought

The outlook for the U.S. harvest has worsened. On Aug. 12, the government said that production will drop 25 percent to a four-year low of 13.05 million bales. In May, it forecast 14 million. Drought in Texas, the biggest grower, will reduce the state’s crop by 18 percent to 4.12 million bales, the USDA says.

Heavy showers returned to parts of the Southeast in the week ended Aug. 25 and some of the wettest areas received more than 4 inches (10.2 centimeters), hampering fieldwork and hurting crops, according to the USDA. While the region is dry now, rain will return Sept. 2 to Sept. 6, according to Commodity Weather Group LLC. About 47 percent of the U.S. crop was in good or excellent condition by Aug. 25, from 46 percent a week earlier, the government says.

In India, the second-largest exporter, rainfall has boosted the outlook for the domestic crop, which the Cotton Association of India estimated Aug. 20 would reach 37.2 million bales, or 3.6 percent more than the USDA forecast this month. A bale in India weighs 170 kilograms.

Selling Reserves

While China is buying from farmers, it is unloading government-owned inventories that the International Cotton Advisory Committee estimated at 7.8 million tons as of July 31, or almost as much as the nation consumes in a year. The state sold 2 million tons from reserves this year through June 6, according to the China National Cotton Reserves Corp. That’s reducing the need for mills to import from foreign suppliers.

Australia, the third-largest exporter, may reap as much as 5.5 million bales this year, more than the 4.5 million forecast by the USDA, Rabobank International said Aug. 8. Production also will rise in Pakistan and Brazil, the biggest producers behind China, India and the U.S., according to Cotlook Ltd., the publisher of a benchmark cotton index.

“The world has too much cotton and not enough demand,” said John Flanagan, the president of Flanagan Trading in Fuquay-Varina, North Carolina. “Only lower prices can shut acres enough so that we can start seeing a multi-year reduction in inventories, which are huge.”

To contact the reporters on this story: Luzi Ann Javier in New York at; Marvin G. Perez in New York at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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