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All the extreme weather is beginning to stack up and hit us, look for more news like this as we begin to realize the effects…

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Flashback to 1870 as Cotton Hits Peak

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.

Stocks end mixed as financials stumbled for a second-straight day while a big jump in Google shares lead technology stocks and the Nasdaq higher. Plus, cotton hit a 140-year high. Mike Reid wraps up all of the day’s market action.

The sudden surge in prices—cotton has risen up to 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 Inc. 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.

European Pressphoto AgencyA migrant cotton picker works in the cotton field in Hami in northwest China’s Xinjiang Uygur.

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-called soft 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.

Cotton Makes a Comeback

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Kevin Leas for The Wall Street Journal

Raw materials make up anywhere 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.

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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.

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 on Friday, the December contract declined 5 cents, or 4.35%, 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 and Pakistan.

Art Resource NYCotton on Friday hit a price not seen since at least 1870. That’s shortly before Degas painted this scene of the New Orleans Cotton Exchange, and not long after the ‘cotton famine’ of the Civil War sent prices soaring. Behind today’s rise: strong Chinese demand and poor harvests.

Demand from Chinese cotton mills has meanwhile 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 by fundamental 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 noted.

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 since 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,” he said.

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