Cotton prices surged more than 3 percent on Monday, jumping past the $1 a lb level for the first time since 1995 as clothing makers and other commercial users who sat out the summer rally were forced to buy at prices driven up by fund investors.Buying by speculators, mill and trade accounts stoked the rally on Monday.
-- Cotton open interest up over 50pc since July Investment funds sitting on money-making long positions were also buyers anticipating cotton prices will get a further boost from consumer demand down the road. High cotton prices have squeezed clothing makers in the United States and around the world.
"It's a perfect storm in cotton," Nick Gentile, senior partner of commodity trading consultancy Atlantic Capital Advisors, told Reuters in an interview. For only the second time since 1960, cotton prices on the ICE Futures US cracked $1 at the start of trading in Asia and the key December cotton contract jumped as much as 3.76 cents or 3.83 percent to trade at $1.0198 per pound.
But the market tailed off late in the session due to profit-taking and the December contract just managed to gain 1.15 cents to close at 99.37 cents per lb.
Trading was heavy though, as total volume stood at 33,622 lots at 2:41 pm (1841 GMT), more than double the 30-day average at 14,418 lots, preliminary Thomson Reuters data showed. Gentile said the rally had a shot at surpassing the lifetime highs in cotton around $1.17 per lb last hit in 1995. Some analysts were wary however that cotton prices were showing signs it is close to a top. "The market's overdoing itself, but it's not ready to quit," said Carl Anderson, a professor emeritus at Texas A&M University and an influential cotton economist. He said the "door is open" for the market to run up further, especially if weather problems hit the harvest in the US and China. India is also a wildcard since the final amount of their likely cotton exports is unknown.
Peter Egli, director of risk management at Plexus Cotton Ltd in Chicago, said the market may be seeing what players call a "blow-off" action although the demand side is still running strong. A blow-off takes place when a market behaves violently at the end of a rally or the conclusion of a sharp fall. "We are making a top this week (in cotton)," said Sharon Johnson, cotton expert at First Capitol Group in Atlanta, adding there was increasing signs cotton futures are about to reach a turning point and correct lower.
Talk circulated some of the biggest market players bought hundreds of put contracts in the options ring to lock in profits, protecting themselves from a sharp fall in the market. "You have to wonder if some of these funds are getting ready to exit their longs," one said.
The cotton rally took off in July as investment, hedge and long-index funds looking for the next big thing in commodities decided to plow money into the market because they felt it was undervalued. Their buying from mid-July caused cotton contracts to gain nearly 40 percent through the end of last week.
Many mills and trade accounts are being crunched by the fact they bought cotton on-call - which means they bought the fiber in the hope prices would correct lower and so have not fixed the price just yet. Peter Egli, director of risk management at Plexus Cotton Ltd in Chicago, estimated the amount of unfixed cotton at 10.5 million (480-lb) bales. The rally has matched a similar surge in 1995, when robust export demand especially from China powered that advance. The surge in cotton prices has blindsided clothing companies in the United States and China.
Levi Strauss & Co will raise prices on some products despite a shaky US economy wracked by steep job losses, the San Francisco-based jeans maker's chief executive told Reuters on Monday. "We already have increased some prices selectively for spring," CEO John Anderson said on his first visit to Israel. "We have definitely felt the pressure of those costs." An official of a clothing sales department in China, the No 1 consumer of cotton in the world, said it has had to hike prices twice a day just to match rising cotton costs.
Hedge funds and long-index funds that piled into the rally early have profited as prices hit stratospheric levels. The US government's Commodity Futures Trading Commission weekly report on September 17 showed non-commercials increasing their net long position in cotton since July five-fold and managed money accounts doubling those positions. But the net short position of producers, merchants, processors and users nearly doubled in the same period to 121,383 lots. Open interest in the cotton market has likewise jumped by over 50 percent to nearly 235,000 lots, ICE Futures US data showed.
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