Cotton for March delivery continued to rise this week and hit a record price of 181.22 cents per pound on Thursday morning.

Speculative buying seems to be driving prices higher, on the view that supply will remain constrained in 2011. Adverse weather conditions have lead to a drop in crop yields in China, Pakistan and Australia, which is driving demand for US cotton higher. China, which is the world’s largest cotton producer, increased their cotton imports by 86% last year as the local harvest fell short of demand. According to the Wall Street Journal, part of the problem leading to China’s shortfall in cotton may be due to local farmers hoarding their cotton yield on anticipation that prices will rise further. Chinese farmers are demanding higher prices for their cotton in order to meet rising production costs. It is estimated that hoarding among the 25 million Chinese may account for 9% of the world’s cotton supply. The China National Cotton Information Center estimates that 1.94 metric tons of cotton is being held off the market, or around 30% of China’s total production last year.

If this is true, then the release of these stockpiles could bring down prices in the near-term. According to Cotton Incorporated, October is traditionally the tightest month for cotton supplies, as this is the period before cotton is harvested for the season. With estimates that 90% of the world’s exportable cotton supply has already been committed, this could mean that cotton prices will remain supported at these levels in the coming months. Further speculative buying could even drive prices much higher. However, cotton prices are very volatile and investors should be wary of a correction in cotton prices towards April and May. There is also the risk that government intervention, or restrictions on trading practices to curb speculative trading, could result in prices easing.