Cotton prices surged to a new record high on Wednesday, fueled by a tight supply and low stockpiles of the fiber in the domestic market.

Workers sort cotton in a processing plant in Nantong, Jiangsu province. China is expected to increase cotton consumption by 1.5 million bales in the 2010-11 plant-harvest cycle to 49 million bales from a year earlier. [China Daily]

Cotton for November delivery on the Zhengzhou Commodity Exchange extended its strong rally on Wednesday by advancing 1.12 percent to settle at 17,030 yuan (US$2,494) per ton. Contract prices have accumulatively jumped by more than 7 percent in the past two weeks.

The surge will continue because the supply deficit is of enormous and is expected to last through 2010. Analysts estimate that China will import more cotton to meet domestic demand as the textile industry recovers.

"Shrinking inventories and this year's adverse weather are the main reasons behind the supply shortage, which may expand further until September when sales of this year's cotton begin," said Wang Yong, an analyst at Hongyuan Futures Co, based in Beijing.

The China Cotton Association said this week that heavy snowfall in Xinjiang Uygur autonomous region, the major cotton producing area, has led to replanting. The bad weather will delay sowing and reduce the yield.

Farmers are also eyeing more profitable crops.

"Cotton growers have few incentives to plant the fiber as they earn much less than farmers growing other kinds of crops," said Jian Jinglei, an analyst at Shanghai CIFCO Futures Co Ltd.

Cotton farmers in Shandong province's Dezhou, for instance, earned 16,410 yuan per hectare in 2009, compared with wheat grower's average earnings of 20,250 yuan per hectare during the same period, Jian said.

In comparison, cotton stockpiles have slid rapidly coming into 2010 when bad weather eroded global cotton output.

But demand from textile manufacturers picked up quickly on the back of the economic recovery.

Under such conditions, the local media has speculated that China will issue around 800,000 tons in import quotas for cotton soon to ease the demand shortfall, indicating that demand is acute that in turn sparked the recent boom in commodity prices.

But market experts estimate the quota remains too small to meet demand, and China, the world's largest cotton consumer, will import more cotton to fill the gap this year.

According to the latest report released by the United States Department of Agriculture (USDA), China is expected to increase cotton consumption by 1.5 million bales in the 2010-11 plant-harvest cycle to 49 million bales from a year earlier.

"The ratio of cotton stocks to consumption is forecast to decline to 21 percent this year, lower than the level of 30 percent that marks a supply-demand balance," said Hongyuan's Wang.

The USDA projects that China will import 2.18 million tons of the crop this year, up from last year's 1.52 million tons, and the figure will grow to 2.5 million tons next year.

"Room for growth in the cotton price will remains until there are signs of a pick-up from the supply side, which may come as early as September when this year's cotton is ready to be picked," CIFCO's Jian said.

Figures from the State-owned Assets Supervision Commission show China faces a supply deficit of around 310,000 metric tons before new supplies of cotton come to the market.

(China Daily May 20, 2010)