Cotton markets have soared reflecting a burst of speculative buying sparked by concerns about smaller stockpiles.
ICE October cotton leapt as much as 5.6 per cent to 75.14 cents a pound on Wednesday, the highest price in two years.
Open interest, or the number of contracts outstanding, in the US cotton futures market has grown by 11.5 per cent this week, reflecting an influx of new buyers.
Cotton had been one of the sleepiest commodity markets in recent years, with prices hovering in a narrow range. That abruptly changed this week, with ICE futures locking at price fluctuation limits on Tuesday and Wednesday.
One trigger was the release of supply estimates by the US Department of Agriculture. The agency estimated global stockpiles would drop 9m bales on year to 91.29m bales by July 2017, 3.4m lower than its previous estimate on increasing Chinese demand. A cotton bale weighs about 500lb.
China’s textile mills sector makes the country the worldΆs largest cotton consumer. The cotton market has for years been capped by uncertainty over a bloated Chinese state reserve built up under a price support programme for farmers. When Beijingannounces sales from the reserve, it tends to push down global cotton prices.
This year, sales from the reserve have been “very strong” with the base sale price reaching nearly 90 cents a pound, suggesting “demand is more broadly-based than previously considered,” USDA said.
Ron Lawson of Logic Advisors, a commodity research group, said China had sold about 5m of 51m bales in the state reserve.
India, the largest cotton producer, has been importing bales to replenish supplies after exporting heavily last year. Cotton farmers in India have also been battling a damaging pest called whitefly.
Still, many traders and brokers remained perplexed as to why cotton prices moved so far, so fast this week. Volumes have been concentrated in the contract for December delivery on the ICE Futures US exchange, a hallmark of speculators rather than commercial merchants, who usually pair futures contracts of different delivery months, Mr Lawson said.
“WeΆve got no good explanation” for the move, said Jordan Lea, chairman of Eastern Trading, a US cotton merchant. “Demand is lacklustre at best.”
Mr Lea added that the higher prices might not last, as farmers had taken advantage of the move to sell forward this yearΆs crop.
Cotton has lost market share to synthetic fibres in recent years. A massive price spike in 2011 caused textile companies to search for alternatives, while petroleum-based polyester has benefited from lower oil prices.
Louis Dreyfus, whose commodities trading businesses include the worldΆs biggest cotton merchant, has sold off cotton assets in response to the global cotton market, it said in an annual report.
