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Cotton futures prices near two-year top, even as ICAC flags falling stocks

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February 2nd, 2017

Cotton futures neared their highest levels since 2014, even as the International Cotton Advisory Committee, forecast another drop in world inventories next season, despite a production rebound.

Cotton futures for March touched 77.35 cents a pound in early deals in New York, the highest for a spot contract in nearly six months, and within 0.50 cents of hitting levels not seen since June 2014.

The gains extended a rally which has been attributed to factors including a large number of outstanding fixations on physical cotton purchases which must be priced against the March contract before it expires.

"Market participants are blaming the price rise on purchases ahead of the expiry of the March futures contract," Commerzbank said.

Furthermore, the bank said that the "cash shortage in India is also apparently continuing to play a role, as it means that supply is being withheld", with producers being unwilling to sell without surety of payment.

Cotton Futures: Are vs yield

The latest gains also came as the ICAC, in its first estimates for cotton supply and demand in 2017-18, which begins in August, forecast global inventories falling for a third successive season, this time to 17.13m tonnes, which would be the lowest figure in six years.

The committee acknowledged the prospect of higher sowings, seen growing by 5% year on year to 30.6m hectares, encouraged by higher cotton values.

In India, the world's top-ranked producer of the fibre, "area is forecast to recover by 7% to 11.2m hectares as firm domestic cotton prices and less attractive prices for competing crops attract more farmers to cotton".

However, the growth in global production will, at 2%, lag the rise in plantings, as the world yield returns to average levels, after soaring 13% in 2016-17 to 781 kilogrammes per hectare.

In the US, for instance, cotton output in 2017-18 will rise by 7% to 4m tonnes, lagging the 10% growth to 4.2m hectares expected in plantings.

Cotton Futures: Chinese stocks shrink

Carryout stocks of 17.13m tonnes at the close of next season would represent a decline of some 5m tonnes from the peak levels reached three years before, thanks to a guaranteed price programme in China which saw the country's inventories balloon.

However, Chinese subsidy reforms, and the sale of some of its huge state inventories, have cut its stocks considerably from peak levels pegged close to 13m tonnes.

The ICAC estimated that China would end 2016-17 with cotton stocks of 9.3m tonnes - approaching the levels in the rest of the world, which are seen growing by 36% to 8.8m tonnes, as China's mills switch from imported supplies to domestic fibre released by state auctions.

Cotton Futures: Selling pressure ahead?

The ICAC also nudged higher, again, its estimate for world cotton prices in 2016-17, this time by 1 cent to 75 cents a pound, as measured by the Cotlook A index of physical prices which, in including an element for transport, typically stands at a premium to New York futures.

Indeed, the Cotlook A on Wednesday was set at 84.25 cents a pound, and the ICAC forecast implies some retreat in values over the rest of this season.

At the Rose Report, Louis Rose flagged that the market could face some imminent selling pressure, noting exchange data overnight showing a jump of more than 41,000 bales to 195,000 bales in cotton held for delivery against New York derivatives.

"With the market overbought, and challenging last year's resistance and former [chart] gap near 78.00 cents a pound, further increases in certificated stock should entice long speculators - at least some - into profit-taking," Mr Rose said.

 - Mike Verdin at Agrimoney.

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