Cotton prices have burst through $2 a pound for the first time, threatening sharp rises in the price of jeans, tee-shirts and other everyday clothing, as mills around the globe race to secure supplies.
The gains to record levels have been stoked by a short-term squeeze as the mills have scrambled to buy futures contracts to fix the prices of physical supplies before Friday, the last available day they can do this on the current March contract.
Veteran traders are warning that prices could rise even further to fresh nominal all-time highs next week, when daily price limits, which restrict price moves to 7 cents a day, are due to be lifted.
Cotton’s runaway gains – it is up 171 per cent from a year ago – are adding to concern about the effects of commodity-driven inflation on the global economy. In the US, consumer prices for clothing rose 1 per cent in January from the previous month. Clothing companies including Levi Strauss and Jones Group have already raised prices and warned of more increases.
Since the beginning of the year, cotton prices have risen more than 40 per cent, in large part because soaring demand from China, poor cotton crops in Pakistan and export restrictions in India that have led to acute supply shortages.
“This is a very real shortage and it’s been in the works since 2007,” said Ron Lawson of Logic Advisors, a commodity broker.
The surge in prices has left the industry reeling as the cotton price has rarely traded higher than $1 a pound for any sustained period over the last three decades.
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.”
For traders such as Louis Dreyfus, Cargill, Olam International, Noble Group and Ecom Agroindustrial that buy, sell and transport the fibre around the globe, this is both a risk, because of the possibility farmers and mills could default, and an opportunity.
In western Texas, for example, which grows nearly a third of the crop in the US, the largest exporter, some merchants suspect farmers are walking away from forward deals to sell cotton at lower prices. The current short term squeeze highlights that risk.
After waiting in vain for a hoped-for correction in prices, textile mills still have commitments to buy more than 1.5m bales of cotton for March delivery “on call”, which means they have fixed the amount of cotton they plan to buy but not the price they will pay.
Mills and merchants usually agree to fix the price by the last day of trading before so-called notices of intent to deliver are given on New York’s ICE Futures US exchange.
Friday is the last trading day before the notice period begins for the March contract. But the cotton market is now, in effect, frozen as prices have in recent days been jumping by their daily limits, making it very difficult for traders to fix the prices they pay to settle contracts.
Some mills have exited their positions. Open interest, or the number of outstanding contracts, fell by nearly half on Wednesday even as trading was locked. But, when the market reopens on Tuesday, after a US holiday on Monday, the fear is that a rush of traders trying to settle contracts could cause prices to rocket.
In electronic trading in New York on Thursday, March cotton rose by the exchange’s daily limit to $2.0402 a pound. Options prices implied a further seven cents move higher.
“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 Kohlmeyer, cotton broker with Michael J. Nugent.
For now, there is no sign of a let-up in the global supply squeeze. Cotton stocks as a proportion of world demand are expected to fall to their lowest in more than 15 years, according to the US Department of Agriculture.
In the US nearly all last year’s crop has been sold. Prices, which have doubled from October, may easily double again.