--Last year's drop from record high sparked a wave of cancellations from textile mills
--The International Cotton Association has received at least 61 arbitration requests this year
--Analyst expects prices to rebound next year
By Leslie Josephs
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Cotton futures on Friday hit their lowest settlement price in almost 28 months, reigniting concerns that contracts will unravel before the fiber is delivered.
Cotton for July delivery on ICE Futures U.S. ended at 68.59 cents a pound, the lowest front-month settlement since Feb. 5, 2010.
Benchmark futures have dropped about 22% over the past month, and the quick decline is reminding the industry of the financially devastating effects last year's price plunge.
Cotton prices ended 2011 down 60% from a record $2.27 a pound hit in March that year, sparking a wave of cancellations from textile mills who had paid for the fiber at high prices and then refused to take delivery.
The Liverpool, U.K.-based International Cotton Association, which sets the rules for most of the world's cotton trade, received a record 242 requests for arbitration that year. The price swing hurt profits at commodity houses such as Olam International Ltd. (O32.SG), Noble Group Ltd. (N21.SG) and Glencore International (GLEN.LN).
The ICA has received at least 61 arbitration requests this year. Between 2000 and 2010, it received 45 requests a year on average.
"There is definitely a concern that it's going to repeat," said Jordan Lea, who sells cotton internationally at Greenville, S.C.-based Eastern Trading Company. "Whenever you have a huge drop in the market, you're going to have these problems."
While business has picked up with the price drop, Lea said his clients are buying cotton for delivery as immediate as two months. Last year, he was selling cotton up to a year in advance.
Sharon Johnson, a senior cotton analyst at Penson Futures, said "The lower cotton goes, the greater issues you have with contracts being honored."
But Johnson expects prices to recover next year, as farmers will likely scale back on plantings due to the low prices. Prices on Friday settled below the 10-year average of 68.95 cents a pound.
"It's incredibly bullish for next year," Johnson said. "You're going to see a huge comeback."
-By Leslie Josephs, Dow Jones Newswires; 212-416-4055; firstname.lastname@example.org
(END) Dow Jones Newswires
June 01, 2012 16:00 ET (20:00 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.