NEW YORK: Spinning mills in the U.S. textile heartland paid their highest physical price for cotton for January in four years last month, stoking fears about tightening supplies as exports soar and output falls in the world's No. 3 producer.
The pinch in supplies of "Memphis East" cotton, coveted by U.S. millers for its proximity to their factories, comes as ginners struggle to process a late, small crop and mills deal with delivery delays and power woes due to cold weather.
The Memphis eastern crop, considered the bread and butter of domestic spinners, is "disappearing very quickly," one U.S. cotton buyer warned.
The average premium for cotton in the North Delta, South Delta, and Southeast U.S. regions hit almost 1.7 cents a lb last month, the highest for January since 2010, U.S. Agriculture Department (USDA) data compiled by Reuters showed.
The premium is paid for physical delivery on top of the ICE Futures U.S. front month benchmark.
January's average premium for the region, which spans the Carolinas through Georgia, the heart of the U.S. textile industry, was 13 percent above last year's 1.5 cents a lb for USDA base-grade cotton, fob car/truck, the data showed.
There is little relief in sight. Premiums typically rise as stocks dwindle towards the tail-end of the season to July 31.
"I don't suspect we will see much of a change in the (premium)," the buyer said.
The supply squeeze and rising premiums have been limited to the Southeast for now. Average physical prices across the United States are near historical norms and traders say Texas, the country's top-producing state, has enough fiber to pick up any slack.
Even so, the main causes of the tightness - surging exports and lower output - are likely to top the agenda at the National Cotton Council of America's annual meeting this weekend in Washington.
The price volatility also comes amid fierce competition from lower-cost manmade fiber. Many mills have raised their use of synthetic materials in recent years due to the wild swings in cotton prices and availability.
UNUSUAL CONTRACTS
If supplies in the Southeast do run dry, some mills may be forced to truck fiber across country from West Texas at greater transportation costs, buyers and merchants said.
Some merchants have even started adding terms to sales contracts for delivery in the summer giving them the leeway to supply alternative origin fiber, market sources said.
"The merchants are having to say that we can't guarantee you Memphis eastern," the buyer said.
While those terms are often used for deals with foreign buyers, they are "unusual" in U.S. mills' contracts, one merchant with a global firm said.
"It's a seller's market," he said.
Mills' hand-to-mouth buying has exacerbated the problem.
EXPORT DEMAND, CARRYOVER INVENTORIES
Dwindling availability has also roiled the futures market.
The July contract's premium over December, which represents the next harvest, has doubled so far this year, hitting 10 cents per lb last week. It was 9.5 cents on Friday.
This week's USDA data showing 8.7 million 480-lb bales have been booked in the first six months of the season highlighted the strength of foreign demand for U.S. cotton.
U.S. farmers have also planted fewer cotton acres over the past two years, opting for more lucrative crops like soybeans and corn, and yields fell in key growing regions due to unfavorable weather this season.
To be sure, traders expect the futures spread to ease in the coming months, and exchange inventories are at two-month highs, indicating merchants have cotton readily available.
But with the USDA expecting inventories to hit a three-year low of 3 million 480-lb bales by the end of July, supplies are critically low. Since 1961, ending stocks have only fallen below that level on eight occasions, USDA data showed.
"Batten down the hatches. We're going to run out of cotton," said Jordan Lea, chairman and co-owner of Eastern Trading in South Carolina.
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