Cotton prices soared to a nominal record high on Friday amid heavy buying in China, the world’s largest importer, and disappointing crops in major producing nations including Pakistan.
The rise in the price of cotton will reverberate through the textile industry, forcing clothing companies to either pass the increase onto the consumer or face lower margins. While the impact is likely to be muted on high-priced clothes, it could be more noticeable in cheaper items such as t-shirts and underwear.
Clothing companies including UK-based Next and jeans maker Levi Strauss & Co have already announced price hikes due to rising cotton costs.
In New York, ICE December cotton futures surged to a record high of 119.80 cents per pound, surpassing the previous record set in 1995. Later, cotton traded up 3.13 cents to 118 cents per pound.
The ICE cotton contract had its origins on the former New York Cotton Exchange, founded in 1870 after the US Civil War.
“We’re just seeing blow-offs here that nobody can imagine,” said Herman Kohlmeyer of brokers Michael J Nugent.
The rise on Friday to a record came after a hectic trading day on Thursday, when futures rose by the exchange-imposed limit. The bidding grew so intense later on the day that the exchange halted options trading for the first time, invoking a month-old rule.
The buying came after the US Department of Agriculture last week lowered cotton production and stock estimates for China.
Traders said that cotton futures in China’s domestic exchanges were trading at 160 cents per pound, much higher than in New York, pointing to acute local shortages.
“China panics, then New York reacts to it the next day,” said Peter Egli, risk manager at Plexus Cotton, a leading merchant.
The market is also braced for lower production in Pakistan, one of the world biggest consumer, after the worst flooding in the country’s history devastated the crop. On top of that, traders are concerned about export restrictions in India, one of the world’s largest exporters.
The USDA estimates that global demand of cotton has outstripped supply for the last five consecutive seasons as farmers moved into more profitable crops, including soyabean.
The surge in prices to a nominal record comes amid large changes in the trading industry of the fiber. The financial crisis was devastating to many old-line traders. An explosive rise in ICE cotton futures in New York in March 2008 burdened credit-constrained merchants with calls to post more money to cover their positions, pushing some cotton specialists, such as the US unit of Paul Reinhart, a 222-year-old company, out of business.
US commodity regulators attributed the sharp spike in prices in part to anxious merchants who unwound selling positions. In 2008, the largest private cotton traders numbered 11; by 2009, there were nine, according to the International Cotton Advisory Committee in Washington.
The industry is now closely watching the potential merger of two of the largest participants on the fiber market: Louis Dreyfus, the French trading house, and Singapore-based Olam International. The merger talks, still at early stages, could see the emergence of a trading house accounting for 30 per cent of the global cotton market.