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Cotton Prices: Room to Rise Even Higher

Stocks in this article: WMT JNY ANF HD M GAP

NEW YORK ( TheStreet) -- Cotton prices have nearly doubled over the past 12 months, making it one of the hottest commodities so far this year.

"Maybe cotton prices were just too low for so long," said INTL/FCStone Fibers & Textiles Senior Risk Management Consultant Andy Ryan. "The U.S. overproduced cotton for many years and was the cheap supplier to the world -- and it only takes a couple of bad crop years and low stock levels to get things going on the upside."

"Still," says Ryan, "no one's ever seen these prices before."

For years, mills had successfully bought cotton on call -- meaning that they would agree with merchants on shipping dates and all other details about a sale, but fix the prices later. Mills would then look for dips in the market before executing their buys.

But this year, "this backfired on them," said Mike Stevens, a Mandeville, La.-based independent cotton analyst who's spent more than 40 years in the cotton industry. Why? Because prices have been explosive.

That said, market research firm IBISWorld predicts that cotton farming revenue could grow by more than 80% in 2011. "We don't expect prices to start coming down until 2012, which will help keep industry revenue high," IBISWorld analyst Nikoleta Panteva explained.

IBISWorld projects industry revenue to grow at an average annual rate of 2.1%, riding on the wave of increased production and sustained high global prices, over the five years to 2016.

In 2010, U.S. cotton exports grew by 70%, with a drastic 151% increase in exports to China, according to the firm.

"Cotton," says Ryan, "really is a global crop."

"It's produced in huge amounts in a few countries, but it's grown in a lot of places around the world" and is becoming one of the commodities that are consumed more and more as countries such as China and India move from developing nation to developed nation. "It's textiles, clothes -- they start to put more things in their closet when they become affluent." This part of the cotton price story, says Ryan isn't going away any time soon.

But beyond the China and India growth story, there's also been a complex web of other big stories that have been major forces in determining the direction of cotton prices.

To find out what they are, read on -- and also learn about price forecasts for the coveted crop and how its doubling affects you -- the consumer, at the retail level ...

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