Cotton prices surge to all-time high
By Gregory Meyer in New York and Javier Blas in London
Published: February 17 2011 09:39 | Last updated: February 17 2011 09:39
Cotton prices burst past $2 a pound for the first time on Thursday and threatened to surge higher as mills race to secure bales against a looming exchange deadline.
Over the past few weeks several clothing retailers have warned that they will raise their prices in response. But with unemployed still high in the US,and Europe, some have warned that they are likely to struggle to pass on the increase to consumers, acknowledging that their margins are likely to suffer this year.
In early morning electronic trading in New York on Thursday, the benchmark ICE March cotton rose by the exchange-imposed daily limit of 7 cents to $2.0402 a pound, a nominal all-time high.
The recent price surge – almost 40 per cent since January – follows years of declining stocks and a vigorous demand rebound after the global financial crisis.
"This is a very real shortage, and it's been in the works since 2007," said Ron Lawson of Logic Advisors, a commodity broker.
However, traders said the latest move higher reflected fears of a short-term squeeze.
Mills have committed to buy a large amount – more than 1.5m bales – of cotton from merchants next month. Most are required to commit to a price for this cotton by Friday, potentially driving up prices in the futures market as they do so. Bales for March delivery whose prices remain unfixed far outnumber bales certified for delivery.
However, mills could face difficulty in closing out their positions. Trading in March cotton futures has regularly frozen after prices hit daily fluctuation limits – as they did on Wednesday and again early on Thursday.
"All those futures should be bought Thursday or Friday, if the market will allow them to be bought. If they don't, it's a mess," said Herman Kohmeyer, a cotton broker with Michael J. Nugent.
The ICE March cotton will enter the so-called "delivery period" next Tuesday after the New York market reopens following a public holiday on Monday. Daily price fluctuation limits are dropped during the delivery period, so traders are bracing for large price movements next week.
Global cotton stocks are expected to fall to their lowest level in a decade and a half, even as consumption has grown. In the US, the largest cotton exporter, most of last year's plentiful crop has been sold.
The global shortage has been aggravated by devastating flooding last year in Pakistan, one of the world's leading producers; a lower-than-expected harvest in China, where farmers are also hoarding supplies in expectation of even higher prices; and export restrictions in India, another important producer.
Robert Antoshak, managing director at Olah, a US-based denim maker, said: "The unknown has bred a psychology of blind panic in the market. You are getting the whole supply chain elevating prices more than you would see based on simple economics."
