Threats to cotton demand from soft developed economies mean investors should not get carried away with the fibre's rally, National Australia Bank said, as prices reached a record high.

The bank acknowledged that the outlook for cotton prices in 2010-11 was "strong", thanks to a 12^th successive year of Chinese consumption for the fibre falling behind domestic production.

Market dynamics in China, the top cotton producer, consumer and importer, "will provide a solid floor for prices", NAB agribusiness economist Michael Creed said.

The comments came as cotton, for a third successive trading day, rose the maximum allowed by New York exchange limits, adding 5.0 cents, or 3.2%, to close at 159.12 cents a pound, a (post US Civil War) record.

Need for margins 

However, investors should be aware too of the price limitations posed by modest consumer confidence in the big developed economies which account for more than half China's textile exports.

"Chinese cotton mills and textile manufacturers need to be able to pass some of the increased cost [of cotton] onto the end user in order to remain viable," Mr Creed said.

Yet a focus by consumers in countries such as Japan, the UK and the US on paying back debt "will ensure household consumption remains soft over the near term".

'Demand side ignored' 

Indeed, high unemployment rates and the knock on effects of government austerity packages meant retail spending on clothing in the big developed economies "has been flat or declining over the past six months.

"Even in Australia, which is experiencing a once-in-a-century terms of trade boom, retail turnover in the clothing and footwear industry has been trending downwards for the past four months," Mr Creed said.

 Current cotton prices were "not likely to be passed on to consumers", given economic prospects, suggesting that the market was not taking weakness in retail spending into account.

"In essence, the market appears to be ignoring the demand side at the moment, [and is being] driven largely by fears of supply shortages more than macroeconomic trends."

Production prospects 

Supply fears had centred, besides on China, where output is due to fall by some 6% in 2010-11, on Pakistan, where floods are expected to cut production by 8%, and on America, where storms in Texas have curbed crop hopes.

However, Brazil is expecting a jump of 45% to 1.22m hectares in its harvested area, after high prices stimulated sowings.

NAB estimated the cotton crop in Australia, the world's third-ranked exporter, at 3.8m bales in 2010-11, around double the levels of a season before.