Australian floods stoke cotton-supply fears

COTTON prices skyrocketed to a 140-year high overnight as investors bet supplies would tighten further before the next harvest.

Prices for cotton powered to a new post-Reconstruction Era high for the second consecutive day.

Deadly floods in major grower Australia have stoked fears that the country's growers will be unable to meet their contract obligations, pushing prices even higher.

Benchmark cotton futures touched $US1.6789 a pound during intraday trading overnight. This is the highest level for the fibre in more than 140 years. Records from the Mississippi Historical Society show cotton fetched $US1.89lb during the peak of the US Civil War.

Many commercial buyers, such as textile mills, have already struck preliminary agreements to buy a certain volume of cotton at an unspecified price, traders say. It is speculative investors that are behind the recent price rise, as commercial buyers await lower prices to lock in purchases. So far, this strategy is backfiring.

“They're going to have to buy at some point,” said John Flanagan, president of Flanagan Trading in North Carolina, referring to mills. “Prices just keep going against them. They're like a deer frozen in the headlights.”

Ever since first breaching Civil War-era levels back in October, prices have defied predictions of a sharp sell-off, underscoring months-old concerns that global cotton supplies will fall behind this year's demand. Heavy rains cast doubt over harvests in Pakistan and India, which is second in global production.

Prices rose even higher as an Australian growers group met with cotton buyers yesterday to discuss contract flexibility in the increasingly likely case that farmers won't have enough crop to fulfil their commitments.

“People are still buying,” said Mr Flanagan. “We're getting more speculative interest.”

The higher cotton prices are expected to be passed along to consumers. Major clothing companies including VF Corp and Hanesbrands are planning to raise prices this year.

These price-increases may result in a cooling of demand for the fibre if they go high enough, said Sharon Johnson, a senior analyst at Penson Futures.

“The demand is under attack not only from higher raw-cotton prices but, in some instances, the failure of these high prices to be sufficiently passed on through the supply chain,” Ms Johnson said in a note.

(Source: http://www.theaustralian.com.au/business/industry-sectors/australian-floods-stoke-cotton-supply-fears/story-e6frg95o-1225994817621)