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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

11/16/2010



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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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11/16/2010



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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

[email protected]

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


11/16/2010



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