US cotton futures finished Tuesday at a fresh all-time high on worries over tight supplies and an overnight surge in China's cotton prices, analysts said. Fiber contracts rallied to close up the permitted daily maximum of 5 cents for the second straight session as strong demand from mills combined with speculation that with a large chunk of the US 2010/11 cotton crop already sold, there will be a shortage by the spring.
"The demand is there," said Mike Stevens, an independent cotton analyst in Louisiana. Cotton is the best performing commodity year to date, outshining the record-setting gold market and wheat futures, which surged higher when Russia's severe drought forced Moscow to ban grain exports in the summer.
Cotton rose more than 20 percent in October and is up nearly 85 percent since the beginning of the rally in July. The ICE Futures US benchmark December cotton contract closed at $1.3426 per lb, a record since the US Civil War era. The exchange's daily limit will expand to 6.00 cents on Wednesday.
The pace of business though was light. Volume traded stood at 19,369 lots at 3:22 pm EDT (1922 GMT), about a third below the 30-day average at 25,786 lots, Thomson Reuters preliminary data showed. Analysts estimate that 80 percent of the US cotton crop, which is forecast at 18.87 million (480-lb) bales, already has been sold. They said most other major producers, such as Central Asia and Brazil, have sold their cotton as well.
"There's no cotton around," said Lou Barbera, a cotton analyst at commodities brokerage VIP Commodities, explaining the spike in cotton prices. China's benchmark Zhengzhou Commodity Exchange cotton contract rose to its price highest ever for the second day on Monday at 29,255 yuan. Open interest in both the US and Chinese markets has exploded since early September reflecting significant speculator participation in the rallies.
In a daily note, the Commonwealth Bank of Australia said: "Continued strong cotton prices in China remain the most supportive influence on global prices and thus far it appears that the higher prices are yet to sufficiently ration demand." Further support came from market talk that India may close off its fibre exports, potentially exacerbating an already tight global supply situation.
Thomson Reuters analyst Wang Tao said US cotton prices, basis the second-position March contract, could rise to $1.4116 per lb over the next four weeks as part of a wave pattern. The March cotton contract also closed up 5.00 cents at $1.2945 a lb. The Cotlook A index cotton price, a global cash price benchmark which combines the average price of the five cheapest cotton prices in the world, plus transport, was being quoted at $1.47 on Tuesday, a hefty premium of nearly 13 cents over New York cotton futures.
The A Index normally enjoys a premium of 6 to 8 cents over US cotton futures. It has been running at a premium of 9 to as much as 15 cents during the rally. Barbera said cotton futures will grind higher so long as cash prices, especially in No 1 consumer China, are running at a large premium to the benchmark ICE Futures price.