buy all essential clothing now years out

If you think 60-80% off sales will be around in 6 months time with retailers fleeing from shopping centres and cotton farmers shifting to grain production (see below) you are on another planet. Cotton is the most expensive (and hence credit requiring) crop to grow out there. Shirts, towels, jeans etc ... grab 'em while they're cheap and available.

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Cotton to Rally as Crop Falls to 25-Year Low (Update2)

By Shruti Date Singh

Jan. 26 (Bloomberg) -- The biggest drop in cotton demand in five decades is setting the stage for the largest price rally in six years as farmers worldwide grow more profitable corn, soybeans and wheat.

Commodity broker FCStone Group Inc. expects U.S. farmers, the world’s biggest cotton exporters, to plant 8.3 million acres (3.36 million hectares) in 2009, the second-fewest in a century. China, the world’s top importer, may cut by 21 percent to 11.6 million acres, the China Cotton Association said Jan. 22.

While the slowing economy will curb consumption in the year through July by 6.1 percent, global demand will exceed output by 5.4 million bales, the U.S. Department of Agriculture estimates. That’s enough for 1.16 billion pairs of jeans or 4.13 billion dress shirts, according to the National Cotton Council. Goldman Sachs Group Inc. and Sucden Financial forecast the shortfall will send cotton futures to 60 cents a pound this year, a 22 percent annual gain that would be the most since 2003.

“Since the beginning of the financial crisis, cotton prices were focused on the demand side,” said Sandra Bachofer, who helps manage $1.2 billion in Stuttgart, Germany, for Zug, Switzerland-based Tiberius Group. Later this year, supply will be key, she said. “Reduced acres, combined with expected rising cotton demand due to an improving global economy, will lead to rising cotton prices in the second half of 2009.”

Clothing Costs

Cotton fell 28 percent last year on ICE Futures U.S. in New York, the ninth-worst of 19 commodities in the Reuters/Jefferies CRB Index, which plunged 36 percent. The price touched 39.23 cents on Nov. 12, the lowest since June 2002. Cotton futures for March delivery rose 1.43 cents, or 2.8 percent, to 52.07 cents a pound on ICE, after earlier reaching 52.2 cents, the highest for a most-active contract since Oct. 20.

Higher prices would erode profit for clothing makers from Warnaco Group Inc. in New York to billionaire Wilbur Ross’s International Textile Group Inc. in Greensboro, North Carolina. At Warnaco, the maker of Speedo and Calvin Klein garments, profit excluding some items will fall 6 percent this year to $115.5 million, according to the mean estimate of six analysts surveyed by Bloomberg.

For Hanesbrands Inc., the Winston Salem, North Carolina, maker of Hanes and Champion clothing, every 1-cent rise in the price of cotton lowers profit before interest and taxes by about $3.5 million, according to estimates by Omar Saad, a Credit Suisse analyst in New York. Hanesbrands may pay 73 cents a pound for cotton during the first quarter, compared with an estimated 66-cent average for 2008, Saad said in a Nov. 12 report.

Planting Plunge

“I am bullish,” said Matt Sena, who helps manage about $600 million, including cotton futures, at New York-based Castlestone Management LLC. “We expect it could move up to the 65-cent area by year-end. The trend of declining acreage dedicated to cotton will continue, and the supply side will continue to deteriorate.”

During the past two years, U.S. planting fell by 5.8 million acres, a 38 percent reduction that is equal in area to the state of Vermont, government data show. Farmers sowed 9.47 million acres in 2008, the fewest in 25 years. The harvest completed last month totaled 13.04 million bales, the smallest since 1989, the USDA said. Each bale weighs 480 pounds (218 kilograms).

The risk for investors is that the output drop may fail to revive prices as shrinking economies erode demand for textiles. World inventories on July 31, 2007, were the highest since at least 1960, USDA data show.

Global Recession

The U.S., Japan and Europe were in recession last year as the housing bubble burst and bank lending dried up, causing more than $1.05 trillion in global credit losses and writedowns, and a financial crisis that President Barack Obama described as “unprecedented” last week.

U.S. gross domestic product will shrink 1.45 percent this year, the steepest contraction since 1982, based on the mean estimate of 68 economists and analysts surveyed by Bloomberg News. Federal Reserve policy makers cut the benchmark interest rate on overnight loans to as low as zero last month to revive the economy and will meet again Jan. 28.

“Too much cotton, not enough demand,” Lars H. Steffensen, a managing partner for Ebullio Capital Management LLP in Southend-on-Sea, U.K., said in an e-mail. The price is “going down,” possibly below 40 cents a pound, he said. “Any rally will get smashed.”

Falling Demand

China, which supplied about 25 percent of the cotton textiles imported by the U.S. in 2007, may use less for the first year in a decade as consumers buy fewer clothes. Advance retail sales of garments in December fell 9.4 percent from a year earlier, Commerce Department data show. The National Cotton Council estimated U.S. retail cotton consumption fell 6 percent to the equivalent of 22 million bales last year and that 44 percent of all textiles purchased were made with the fiber.

Global cotton use will total 115.24 million bales in the year through July 31, down from 122.69 million a year earlier and the biggest drop since at least 1960 as India, Pakistan and Turkey buy less, the USDA said.

“World stocks are expected to decline, but the stocks-to- use ratio, a measure of how tight stocks are relative to demand, has actually ballooned to 51.5 percent,” Don Shurley, a cotton economist and professor at the University of Georgia in Tifton, said in a report Jan. 20.

Unprofitable Crop

Production is dropping because cotton is unprofitable. Along the Mississippi River Delta, a main U.S. growing region, farmers lose $55.90 an acre on average because of falling prices and increasing costs for fertilizer, a study by Mississippi State University in Starkville showed. The same land, planted with soybeans would earn an average $161.25 an acre and $93.36 for corn, the study showed.

In addition to lower sales prices, cotton costs $706 an acre to grow, including fertilizers, pesticides and fuel, almost twice the $355 expense for soybeans, according to the Agriculture Department.

“There’s no price incentive at the moment for U.S. farmers to stick by cotton,” said Gary Mead, an analyst with London- based VM Group, which publishes a monthly commodities report with Fortis Bank. “The longer this price remains depressed, the more decline in cotton plantings we will see, which will lead to a much sharper price increase when the economic outlook is brighter.”

Gene Roney, whose family has grown cotton in Georgia since before the Civil War, said he will sow as few as 800 acres in April, down from 3,000 in 2007, and probably won’t produce the crop at all next year.

‘No Brainer’

“With corn, you can get a positive return and cotton a negative return,” Roney, 50, said in an interview by telephone from Vienna, Georgia. “We can’t keep losing money. It’s a no- brainer. The numbers didn’t add up and still don’t.”

Cotton must sell for about 70 cents a pound to cover production costs, Roney said. The USDA forecast this month that farmers will receive 44 cents to 52 cents a pound in the year through July 31, up from a December forecast of 41 cents to 51 cents.

Farmers may harvest 10 million to 11 million bales in the U.S. this year, which may be the fewest since 1986, said Jerome Jourquin, branch manager for Sucden Financial Ltd. in Paris. Cotton may trade between 55 cents and 60 cents when the crop is harvested later this year, Jourquin said.

The industry suffered last year from plunging textile demand, a lack of lending from banks and cotton-price swings that sparked a review by the U.S. Commodity Futures Trading Commission into allegations of market manipulation.

Traders Quit, Bankrupt

Weil Brothers & Stern Ltd., an alliance of two families that began trading cotton more than a century ago, said it will close early next year because the business became too risky. Richardson, Texas-based Paul Reinhart Inc., which started as a Swiss cotton importer in 1788, filed for bankruptcy Oct. 15. The company cited a “severe liquidity crisis” tied to losses on contracts as prices surged as much as 36 percent from the end of January to early March.

Cotton futures jumped to a 12-year high of 92.86 cents a pound on March 5 and options on those contracts took the price above $1 on ICE Futures in New York as investors poured money into commodities.

By the end of 2008, cotton was down 28 percent for the year. Corn and soybeans fell less, dropping 11 percent and 20 percent, respectively, partly because more of those crops are being used to make grain-based fuel, including ethanol.

“With cotton prices having underperformed grains, the fiber is likely to lose out in the battle for 2009 U.S. acreage, which should provide some price support despite a weak demand side,” Barclays Capital said in a Jan. 22 report. Cotton futures may average 56 cents in the fourth quarter of 2009, up 7.3 percent from today’s intraday high, Barclays said.