Cotton futures neared two-year highs, a day after the U.S. Agriculture
Department made bullish cuts to world stocks and increased U.S. exports, and
traders are nervously eyeing Pakistan where devastating floods have likely
washed away a significant share of the country's cotton.

Cotton futures for nearby October delivery on ICE Futures U.S. rose 0.74
cent, or 0.85%, to settle at 87.49 cents a pound Friday. Most-active December
added 0.63 cent, or 0.75%, to end at 84.18 cents a pound--the strongest price
for the contract since Sept. 12, 2008.

On a front-month daily continuation chart, cotton prices approached levels
not seen in 2 1/2 years.

Triggered by monsoon rains, Pakistan floods have killed about 1,600 people,
forced about 2 million from their homes and taken a bite out of its crop
output. The loss to agriculture and livestock is expected to run into the
billions of rupees. Ibrahim Mughal, chairman of the Pakistan Agricultural Farms
Association, said around 17 million acres, or 6.88 million hectares of standing
cotton, rice and sugarcane have been damaged.

The U.S. Agriculture Department in its August crop production and
supply/demand reports Thursday cut Pakistan's production estimate by 700,000
bales to 9.5 million for the current 2010-11 cotton crop. Analysts expect
further cuts in the coming months as the extent of the damage becomes known.

"Another cut is very likely," said Mike Stevens, independent cotton analyst
and broker based in Mandeville, La. "The 700,000 cut was probably conservative
based on only anecdotal evidence," he said.

Pakistan is expected to import 2.3 million bales during the current crop
year, while its exports are small at an estimated 300,000 bales, USDA data
shows. It produces a significant amount of cotton, however, estimated at 9.5
million bales, short of consumption pegged at 11.50 million bales.

Particularly hard-hit by the floods is the agricultural-intensive Punjab
province, which contributes about 68% to annual food grain production in the
country and where rice, cotton and sugarcane are main crops. The province
contains nearly 12,000 textile mills and more than 6,500 ginning operations.
All the major rivers of the country flow through Punjab.

But traders are not only focused on Pakistan. Global cotton supplies have
tightened as world economies rebounded in the last year, spurring textile
demand. As a result, the USDA cut global ending stocks by 4.3 million bales to
45.61 million.

Global cotton output is estimated at 116.85 million bales, up from 116.02
million in July, as farmers planted more of the fiber in response to higher
prices and stout demand. If achieved, it would be the third-largest crop on
record.

China, the largest cotton producer and importer, saw its consumption estimate
raised by 1 million bales. The USDA raised China's import projection by 850,000
bales in response to the increased demand.

Since hitting a low of 72.96 cents July 21, U.S. cotton futures have rallied
15.6%, spurred in large part by tight nearby supplies. The situation is
expected to loosen, however, when the U.S. begins its bountiful harvest in the
fall.

The USDA on Thursday raised its projection for the U.S. crop to 18.53 million
bales, from 18.3 million in July, as the crop benefits from a nearly ideal
start to the growing season and an increase in planted acres. The new estimate
represents a 52% increase over last year's output, owing largely to rising
production out of top grower Texas, pegged at 8.8 million bales and a 90% jump
from last year.

The U.S. is expected to ship 15 million bales of cotton from the
significantly larger crop, a figure that the USDA hiked by 700,000 bales.

But much will depend on economic activity. Recent data and guidance from the
Federal Reserve has indicated another slump, which would hurt textile demand as
consumers scale back purchases.

High prices and sub-par economic growth in the U.S. and the world "argues
against increased cotton consumption, both of which will be factors in limiting
the upside in the second half of the crop year," said Sharon Johnson, senior
cotton analyst at First Capitol Group in Atlanta.

The U.S. cotton crop undoubtedly got off to a great start, but there are
small signs of stress in the parched Mississippi Delta region that has been hit
by an oppressive heat wave. The plant often does well in less-than-ideal
conditions, however.

"Cotton is a very hardy crop," said Sid Love, analyst with Kropf & Love
Consulting in Overland Park, Kan.

ICE Close Change Range
Oct 87.49 +74 87.00-89.17
Dec 84.18 +63 83.23-85.71
Mar 82.55 +78 81.55-83.16