Cotton cotton, wheres the bottom?

Whats white and soft, and yet bullish at the same time? You guessed it - cotton
Internationally, cotton prices hit a 15-year high of nearly 115 cents per pound on October 14 this year. Spurring this price hike were supply-side shortages mainly due to damage to Chinas cotton crop, the floods in Pakistan, and the export ban in India. The United States Department of Agriculture (USDA) forecasts an excess of consumption over production for 2010.
The rally was also matched locally with prices of the precious fluff-ball rising sharply by around 87 percent - from Rs4450 in January 2010 to an alarming Rs8300 last Friday.
For the local fibre manufacturers, this might signal a time to celebrate with promises of windfall profits due to the sky-rocketing cotton prices. Add to this the concessions awarded by the EU, which grant duty-free access to exporters of yarn, plain fabric and semi-finished goods, and yarn exporters stand at a further advantage.
Obviously, there will be a spill over effect on the countrys trade balance as well. According to Shahid Anwar Tata of Salfi Textile Mills, there can be a benefit of $3-4 billion to the Pakistani economy due to the price increase, which can be passed on to importers.
He also dismissed fears that the resultant raw material shortages will spur cotton imports, which can be counter-productive, claiming that there will be a net benefit even if it has to be imported locally.
If this argument holds truth, the rural economy stands to benefit significantly as well since the price increase will boost profits for growers as well.
But all is not as hunky-dory as it seems. "The price rise is driven by a lot of speculation, and this is also taking place in Pakistan. Fund managers and investors have pushed up prices which can be detrimental for the textile industry in the long run," former Chairman, Pakistan Bed Wear Exporters Association, Shabbir Ahmed, told BR Research.
Even though fibre manufacturers will benefit from the price hike, it will be devastating for the finished goods exporters whose cost of production will increase because of the consequent rise in local cotton prices.
Further, as growers, lured by rising prices, will allocate more turf for the precious white, prices might stabilise in the next year. International media has cited Brazilian farmers as setting aside more land for the cotton crop in anticipation of higher gains.
Yet, expectations of shrinking supply of cotton from China and growing global textile demand may keep the prices buoyed up next year.
For the moment, the supply-side shortages are likely to keep international prices steamy. However, any action by the Pakistan government to prevent cotton exports will change local price dynamics considerably.