Cotton is set to fall to the lowest in five years as demand slows in China, the world’s biggest consumer, and India heads for a record crop, Arvind Ltd. (ARVND) said. Futures declined for the first time in three days.

Prices are poised to retreat to a range of 55 cents to 60 cents a pound by December, said Sanjay Lalbhai, chairman of India’s biggest denim maker, which retails Gap Inc. and Tommy Hilfiger Corp. brands. The harvest in the South Asian nation, the world’s second-largest grower, may jump to a record 40 million bales of 170 kilograms (375 pounds) each in the 12 months starting Oct. 1 from 37 million bales this year, he said.

Futures slumped 21 percent in New York this year, making it one of the worst performers on the Bloomberg Commodity Index of 22 raw materials, as global stockpiles increase to a record high. Lower prices would help reduce costs for Gap and Levi Strauss & Co. as the U.S. government predicts the country’s inventories will expand at the fastest pace in three decades.

“Cotton has an oversupply situation both in the global market as well as the domestic market,” Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities Ltd., said by phone from Hyderabad. “The demand dynamics are also weakening as countries like China have got a lower appetite.”

Futures have declined 31 percent from a two-year high of 97.35 cents reached on March 26 and traded at 67.13 cents on ICE Futures U.S. today. October-delivery contract on the Multi Commodity Exchange of India Ltd. declined 0.4 percent to 18,280 rupees per bale.

China’s imports fell 39 percent to 1.67 million tons in the first seven months from a year earlier, according to data from the General Administration of Customs. The country holds more than half of the global inventory, the U.S. Department of Agriculture estimated on Aug. 12.

Slowing demand from China would reduce India’s exports next year even as the harvest increases, Lalbhai said in an interview in Mumbai on Aug. 22. Shipments are estimated at 11.4 million bales this year, he said.

“It’s going to be a challenge to export the same amount of cotton next year,” Lalbhai said. Prospects for yarn exports, mostly shipped to China, may also be hurt by weakening demand in the Asian country, he said.

Stockpiles in the U.S., the world’s biggest exporter, will probably more than double to 5.6 million bales of 480 pounds each by July 2015, the biggest increase since 1986, the USDA said Aug. 12. Global reserves are poised to reach an all-time high of 105 million bales, the USDA estimates.

Declining cotton prices are “good news” for Gap and will benefit the company, Chief Financial Officer Sabrina Simmons said in an earnings call on Aug. 22.

Futures will probably find support in a range of 55 cents to 60 cents which equals the rate at which Chinese traders can import without government quota restrictions, according to Paul Reinhart AG. The price is equivalent to 65 cents including shipping and insurance at Chinese ports, Thomas Paul Reinhart, who is head of sourcing and marketing China, said in an interview on Aug. 5.

Source:- bloomberg.com