Photo: Uriel Sinai/Getty Images
India announced an unexpected ban on cotton exports yesterday driving up prices.The last time prices surged, falling demand wasn’t the only consequence.
After supply disruptions started in 2010, cotton prices exploded from $0.70 to about $2.25 per pound last year. And a bit of chaos ensued.
Here’s some of what happened.
In Texas, farmers and the some of the world’s biggest cotton traders began sparring over supplies as the price of a cotton bale soared at one point to $2.25 per pound. Merchants purchasing cotton from Texan farmers accused them of not upholding contracts signed when cotton prices were lower, according to Financial Times. The spats ended in lawsuits, arbitration claims and an anonymous tip line – the cotton integrity reporting line – for informants.
The International Cotton Association (ICA) said it received 242 requests for technical arbitrations in 2011, a record number that was over five times their normal yearly average.
And supply disruptions also impacted earnings of major commodity traders like Glencore which lost over $330 million trading cotton last year. In their earnings announcement they said cotton was by far the key negative to their earnings results:
“The cotton market began to normalise by late 2011 after a period of unprecedented volatility. In H2 2011 prices ranged between US¢ 90 and US¢ 110 per pound, having been as high as US¢ 214 per pound early in the year. As noted earlier, contract performance issues and the disconnect between futures prices and physical markets at various times during the year, created a very challenging environment.”
But the biggest risk of all is the vicious cycle this could set in motion. This morning Nomura’s Rob Subbaraman warned that rising commodity prices would push countries to watch out for their own interests by hoarding cotton, banning exports, etc. a scenario that would only make the existing problem worse.