Inflation fears mount as cotton prices hit new high
Poor harvests, soaring demand from China and market speculation have "exploded" the cotton market, traders say, with December future prices in New York hitting record highs of almost 120 cents a pound yesterday, before subsiding in later trading.
Cotton has thus punched through its previous historic high, seen in 1995, and is up by around a third on where it stood three months ago. Though the impact on retail clothing prices and the overall rate of inflation will be more muted (the raw material accounts for only a small proportion of the value of a finished garment), it adds to strong inflationary pressures in food and raw materials that will make the next few months uncomfortable for hard-pressed consumers, who are also facing an increase in VAT to 20 per cent in January.
The Bank of England's policymakers now face the prospect that inflation will stay stubbornly above the official target of 2 per cent next year, even as the economy slows more quickly than expected. The Consumer Price Index measure is already 3.1 per cent and the dilemma for the Monetary Policy Committee in preparing for its next announcement on 4 November is as acute as any in its history.
Plexus Cotton, one of the world's most important traders, said cotton futures had "exploded to the upside", though momentum might now start to slip. "The market doesn't look like it's done breaking records just yet," said the company. "We have now entered what appears to be the blow-off phase of this rally, with prices ascending in parabolic fashion."
The latest rally was sparked by a report by the China Cotton Association (CCA), which revealed that cotton imports reached 201,000 tons last month, maintaining the recent run of strong data, as demand for the crop runs at twice last year's pace. China is the world's largest importer of cotton. As the world economy has picked up, so has demand for cloth, shirts, hosiery and other products from China's bustling mills, especially from overseas. Demand in China is forecast by the US Department of Agriculture to rise to 10.9 million tons this season, from 10.7 million tons a year ago, creating a "severe shortage".
On the supply side, China also boasts the world's largest cotton crop, but this promises to be disappointing. The CCA has issued a fresh downgrade on its forecasts for the country's cotton harvest, and inventories held outside state stockpiles have almost halved. Production in Pakistan has also been hit by the floods. Cotton crops in India, China, Pakistan, Uzbekistan and the US are late by between two and six weeks. Click here to read more...
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