China Likely to Pressure Cotton Prices

Why hasn't inflation caught up with a monetary-induced boom in China? One might argue that China's policy of keeping the renminbi cheap amounts to an export subsidy that has been an important factor fueling its growth. But that thesis is puzzling to economists who reason that a cheap-currency policy can only get you so far. Paul Krugman explains:

By CommodityHQ: Cotton, the fluffy commodity, was one of the most talked about investments of 2010. With a number of factors combining, cotton prices spiked to historic highs last year and led to a number of investors jumping in on the trend, only to get burned when cotton tanked midway through 2011. Global consumption for this year was expected to surge, but unfortunately, the expected 120 million tons of cotton use was revised down to 113 million after issues in China and Pakistan led to lower demand.

Inquiring minds as well as commodity bulls need to consider the likely economic impact of China's commodity imports and how sustainable those imports are.

Money Morning submits: By Don Miller Reacting to a potential squeeze that threatens to drive up cotton prices, the biggest cotton-futures exchange took measures last week to prevent speculators from taking big positions.

Investment U submits: By Tony D'Altorio Cotton prices have surged beyond $2 a pound, the highest level they’ve ever hit. The fiber didn’t even go that high during the Civil War’s cotton embargo.It is now up 170% since a year ago, and more than 40% since the beginning of 2011. Short-term squeezes have definitely contributed, as mills scramble to buy futures contracts to fix physical supply prices. But there are solid fundamentals to blame as well.

By Matt Schilling:On Friday, China had fulfilled its intention to release a portion of the cotton it had held in its state-based reserves. Many analysts believe the move could potentially create a shift in the global markets in which the fiber is traded.

Chinese purchases of U.S. and global cotton have kept the market afloat for almost a year, but U.S. forecasters say that demand is tapering off.

Cotton output in China's top producing region is expected to be 4% higher, putting downward pressure on global prices, further straining the country's cotton marketing regime and squeezing its textile exporters.