A Cotton-Picking Problem

This article originally appeared on RealMoney.com on Sept. 4, 2014 at 10:30 a.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.

Earlier this week, I shared my renewed enthusiasm for poultry stocks Pilgirm's Pride  (PPC)  and Sanderson Farms  (SAFM) . While you might think it has something to do with the continued move up in beef prices, you'd be a little less than half right.

The new driver behind the why is the drop in corn prices due to expectations for a strong harvest this year plus a surplus in China. That said, corn is not the only commodity to have dropped precipitously over the last few weeks.

Cotton -- what used to be the fabric of our lives -- has been falling. It has been replaced for some by synthetics such as Under Armour  (UA) (or, as I tend to only half kid about, semiconductor chips). Cotton prices have also slipped because a large U.S. and global harvest is expected this fall.

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The International Cotton Advisory Committee said on Tuesday that the 2014-15 season, which began Aug. 1, will be the fifth in which production exceeds consumption.

Cotton prices have retreated to the lowest level in nearly five years as investors worry that global production could overwhelm demand for the fiber.

July 27: The U.S., the world's biggest cotton exporter, is expected to produce a large crop in the season that begins Aug. 1. But global demand is likely to fall short, especially with top importer and consumer China wrapping up a 21/2-year stockpiling program. U.S. government forecasters predict the amount of cotton left over in warehouses world-wide when the next season ends will reach an all-time high of 105.7 million bales.

After years of drought, Texas has begun to see rain in cotton-growing areas. Government forecasters, citing the rainfall, recently increased their estimate for U.S. cotton output during the 2014-15 season by 10% to 16.5 million 480-pound bales, exceeding market expectations for a 4.7% upward revision to June's estimate.

There are also concerns about weakening demand. The International Monetary Fund (IMF) recently cut its global economic-growth forecast for this year to 3.4% from an April estimate of 3.7%, damping sentiment in the cotton market. Cotton prices are particularly sensitive to economic data, because demand for the fiber is tied to consumer spending on items such as apparel, bed sheets and towels.

China had been a major support for the market, quadrupling its stocks since it began a strategic purchasing program in late 2011. But that program is wrapping up, as China has had trouble unloading its massive stores of the fiber on the domestic market.

Aug. 12, USDA: All cotton production is forecast at 17.5 million, 480-lb. bales, up 36% from last year.

Source: National Cotton Council of America

Yield is expected to average 820 lbs. per harvested acre, down slightly from last year. Upland cotton production is forecast at 16.9 million 480-lb. bales, up 38% from 2013. Pima cotton production, forecast at 556,000 bales, is down 12% from last year.

Producers expect to harvest 10.2 million acres of all cotton, up 36% from 2013. This harvest total includes 10.1 million acres of Upland cotton and 175,900 acres of Pima cotton.

On the denim retail side, HanesBrands  (HBI) , Joe's Jeans  (JOEZ) and Seven for all Mankind may have margins hold up better than expected in the coming quarters. But this does little to alleviate the volume concerns that were raised by the rash of retailers issuing tepid outlooks over the last few weeks.

Like my dad always said, you can always use more socks and underwear.

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At the time of publication, Versace had no positions in the stocks mentioned.

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