By Gregory Meyer in New York , Financial Times, 20 Sep 2010

The price of cotton has vaulted above the key $1 a pound level for the second time in history as worries about a shortage of the fibre prompted textile mills to scramble for supplies.

Cotton futures for delivery in December have risen by almost 30 per cent since the beginning of August to reach $1.0198 a pound on Monday, the highest since 1995.

"It's the second time since the Civil War cotton prices have gone over a dollar," said Jordan Lea, president of the American Cotton Shippers' Association, referring to the 1861-1865 war between US states. "It's a relentless bull market."

The rise in cotton prices has easily outpaced increases in more industrial commodities such as oil or copper. Tight supply conditions, exacerbated by losses in Pakistan, the world's fourth-largest grower, after it suffered devastating flooding, have drawn hedge funds and other speculators to the New York cotton market.

The moves come as this year's crop in China, the largest producer and importer, has been threatened by rain, said Gary Raines of brokers FC Stone. In India, the second-largest grower, the government has left traders guessing about the future of an export ban imposed this year.

The US Department of Agriculture projects the world ratio of inventories to consumption at the lowest in 15 years.

The US, the largest exporter, last week reported a surge in shipments to China, Mexico, Colombia and other mill centres. "Panic is such a dirty word, but perhaps it is at the root of the most recent 3 cents of gain," Ron Lawson of Logic Advisors, a commodities researcher, told clients.

The sharp rises in the price of cotton this year have increased pricing pressures on clothing manufacturers, adding to concerns over increased labour and energy prices. But leading US retailers have been pushing their suppliers to absorb costs.

Mike Ullman, chief executive of JC Penney, the mid-price department store, said that retailers would have difficulty in passing price rises on to their customers. "We don't think inflation is a major problem for retail, because frankly the underlying economy is not going to be inflationary in our view in the next 12 to 18 months," he said.

Textile mills could begin to weave more polyester into fabrics. On China's Zhengzhou Commodity Exchange, cotton has gained 16 per cent this year, while the price of a polyester proxy has fallen more than 7 per cent.