Cotton fortified its status as the best-performing commodity of 2013, rising to an 11-month high on the back of strong demand.
New York futures have gained 20.6 per cent this year, outpacing other rising markets such as orange juice, gasoline and US natural gas.
ICE May cotton increased 2.3 per cent on Thursday to 90.61 cents a pound, bringing cotton above 90 cents for the first time since last April. Brokers said the rise had come after merchants, normally sellers of cotton, had already hedged most inventories while textile mills and hedge funds emerged as energetic buyers. Money managers’ net bullish position in cotton has doubled this year, data show.
“If you’re a hedge fund and you’re looking for momentum, this is it,” said Herman Kohlmeyer, cotton broker with Michael J Nugent in New Orleans.
The US triggered the latest rise with data showing net export sales of upland cotton rising 25 per cent in the past week to destinations from Turkey to China. Exports have so far totalled 6.77m bales in the marketing year to the end of July, up more than a fifth from the same period a year ago.
The US is the world’s top cotton exporter, while China is the biggest importer. The International Cotton Advisory Committee, an inter-governmental group, this month reported a “ferocious Chinese buying spree” as Beijing added to its national cotton reserve, a stockpile meant to support farmers in restive Xinjiang province, source of half of China’s cotton harvest, and other regions.
China’s stocks, which ICAC estimates at almost half of global stocks, are a source of uncertainty for cotton traders. The government buys bales above market prices, supporting global markets. Any sales from the hoard loom as a threat to imports.
“China’s policies have driven world cotton market developments in 2012/13 and will continue to do so for the foreseeable future,” the US Department of Agriculture said in a cotton outlook last month. The agency expects global stocks will expand 18 per cent to 81.7m 480lb bales this marketing year.
As hedge funds buy cotton, merchants have been building a net selling position in futures. Plexus Cotton, a UK-based merchant, recently warned of a “potentially explosive situation” if merchants bought back futures to unwind cotton positions. In 2008 and 2011, cotton futures spiked as merchants struggled to close out so-called “short” positions.
Only bales picked on US soil may be used to satisfy futures delivery obligations on the IntercontinentalExchange. The industry is discussing whether to amend the futures contract to allow other delivery locations in an attempt to avoid costly squeezes.