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Saturday, October 16, 2010 New York 57º|54º
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COMMODITIES OCTOBER 16, 2010
Flashback to 1870 as Cotton Hits Peak
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n Climbs to 140-Year High - WSJ.com http://online.wsj.com/article/SB10001424052748704300604575
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Cotton Makes a Comeback
Farm Belt Bounces Back10/11/10
By ADAM CANCRYN and CAROLYN CUI
Cotton prices touched their highest level since Reconstruction on Friday, as a string of bad
harvests and demand from China spark worries of a global shortfall.
The sudden surge in prices—cotton has risen
as much as 56% in three months—has
alarmed manufacturers and retailers, who
worry they may be forced to pass on higher costs to recession-weary consumers.
The December cotton contract hit $1.1980 a
pound minutes after the opening of trading on
the IntercontinentalExchange on Friday. It is
officially the highest price since records
began back in 1870 with the creation of the
New York Cotton Exchange.
The Mississippi Historical Society has its own
records that show cotton was changing
hands at $1.89 a pound during the middle of the Civil War, which lasted from 1861 to 1865. In
the early stages of the war, the South halted exports in a failed attempt to draw Europe to its
defense. Then later, the North imposed a blockade, crippling the South's ability to ship cotton
to Europe.
The U.S. was then the largest cotton
producer at the time and the halt led to what
was dubbed the "cotton famine."
"I've seen a lot of big moves, and this
exceeds everything," said Sharon Johnson,
senior cotton analyst at First Capitol Group,
a financial adviser. "It's not something you're
going to see again in your lifetime."
The cotton surge is part of a broad-based
commodities rally since the beginning of the
year, underpinned by fears over a weakening
dollar, healthy demand from emerging
markets and various weather-related supply disruptions. Along with cotton, prices of so-calledsoft commodities such as sugar, orange juice and coffee all have soared, adding to concerns
that consumers might soon be paying higher prices for daily necessities.
For the apparel industry, rising prices have upended roughly two decades of cheap cotton.
Consumers have become used to relatively low prices, making it hard for garment producers to
pass on the rising costs, especially as the economy struggles to recover.
Raw materials make up between a quarter
and half of the cost to produce a garment.
The most at risk are discount retailers that
compete on price and sell large quantities of
cotton-based basic items, such as T-shirts.
But clothing manufacturers of all price levels
may be forced to decide between absorbing
the costs or passing them on. Some say they
also are exploring different materials,
including synthetic blends.
Jeans maker Levi Strauss said earlier this
year that higher cotton costs would result in
price increases. And in the past month,
executives from Kohl's Corp., Aeropostale
Inc. and Guess Inc. have mentioned increased pressure from cotton prices.
Brian Tunick, managing director at J.P. Morgan, said last week that cotton prices, along with
sales and inventory pressures, could lead to "substantial downward" revisions in earnings per
share in the specialty-apparel sector.
Save This + More
Stocks end mixed as financials stumbled for a second-straight day while a big jump in Google shares leadtechnology stocks and the Nasdaq higher. Plus, cottonhit a 140-year high. Mike Reid wraps up all of the day'smarket action.
European Pressphoto Agency
A migrant cotton picker works in the cotton field inHami in northwest China's Xinjiang Uygur.
Kevin Leas for The Wall Street Journal
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Jennifer Fritz, chief executive of Bambeeno Cashmere Inc., a children's apparel producer in
Atlanta, decided to scrap all the cotton-cashmere blend items from its spring production line
due to the sudden rise in cotton prices. Since it is hard to raise prices in this economic
environment, Ms. Fritz said she would have to swallow the rising costs of cotton and lose
money on her collection. "It's just not worth doing so," she said.
Price increases could come in the first quarter next year, according to Sterling Smith, an
analyst at Country Hedging, a brokerage firm.
While the recent price eclipses the previous nominal record of $1.1720 in 1995, it is still a way
off from the inflation-adjusted high of $5.2644 in 1918, when demand was soaring due to the
textile industry's explosive growth. And, after peaking early in the trading session Friday, theDecember contract declined five cents, or 4.4%, to settle at $1.0987.
Cotton futures prices pushed past the $1 a pound level on Sept. 20 for the first time since
1995. In the intervening 15 years, cotton prices have largely traded between 40 cents and 80
cents.
Prices began moving higher in July as it became clear that a rekindling of demand for cotton
—spurred by manufacturers restocking as the economy recovered—collided with fears of a
shortage.
Pakistan, the fourth-largest producer of cotton, saw its crops affected by devastating floods
this summer. Heavy rains in China crimped that nation's crop, resulting in a 5.4% drop in global
production in 2010.
China is the largest cotton producer, followed by India and the U.S. Even though India and the
U.S. reported bountiful harvests this year, it didn't make up for the declines in China andPakistan.
Meanwhile, demand from Chinese cotton mills has shown no signs of slowing. The U.S.
Department of Agriculture said China bought 267,700 running bales of U.S. upland cotton last
week, more than half of the total bales exported and more than the country usually takes.
On Friday, the
China Cotton
Association
issued a
warning on its
website, saying
that this surge,
though
supported byfundamental
factors, was
largely caused
by speculators.
"It has messed
up the order of
purchases, led
to lower quality of cotton and put the industry's sustainable development on danger," it said.
In Kennett, Mo., cotton farmer Tom Wilkins has just finished harvesting 2,500 acres of cotton.
He said that "this is the best year" since he started planting cotton in the 1970s.
However, the lofty prices are making some cotton farmers worry.
"I hope it won't go too high. If you can't put it into clothes and clothes become too expensive,prices will come down," Mr. Wilkins said.
—Elizabeth Holmescontributed to this article.
Write to Carolyn Cui at [email protected] and Adam Cancryn at
Art Resource NY
Cotton on Friday hit a price not seen since at least 1870. That's shortly before Degaspainted this scene of the New Orleans Cotton Exchange, and not long after the 'cottonfamine' of the Civil War sent prices soaring. Behind today's rise: strong Chinese demandand poor harvests.
Copyright ©2010 Dow Jones & Company, Inc. All Rights Reserved
n Climbs to 140-Year High - WSJ.com http://online.wsj.com/article/SB10001424052748704300604575
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