NY cotton ends limit up on surprise India export ban

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* Indian imposes ban on cotton exports, prices surge

* Chinese mills may turn to US, but American supplies slim

* Slowing Chinese economy may cut cotton imports

By Rene Pastor

NEW YORK, March 5 (Reuters) – Cotton futures, which only last year hit a historic peak above $2 a lb, rallied to close limit up on Monday, spurred by India’s

surprise ban on exports of its cotton.

That stoked speculative fervor that Chinese mills may have to turn to thinning U.S. cotton supplies, evoking memories of the rally which saw cotton prices treble in August 2010 and eventually climax at $2.27 in March 2011.

The benchmark May cotton contract on ICE Futures U.S. exchange soared its 4-cent daily limit to close at 92.23 cents per lb, a rise of 4.5 percent and posting its biggest one day move in a month, Thomson Reuters data showed.

Monday’s volume of nearly 24,000 lots was about 1 percent under the 30-day average, according to the data.

India banned cotton exports with immediate effect to ensure ample supplies for the domestic textile industry, which accounts for 4 percent of GDP in a South Asian nation with a population of over 1 billion people where preserving jobs is deemed vital to stability.

“That set the ball rolling,” said Peter Egli, the director of risk management for Plexus Cotton Ltd. “It created a short-covering rally.”

Egli said the Indian ban wrongfooted investors, especially on the heels of data from the U.S. Commodity Futures Trading Commission showing that speculators had switched to a net short position in cotton for the first time in a year.

Since early February, speculators have switched their position in cotton by over 20,000 lots, from a net long then of 14,768 to a net short of 5,254 lots, the CFTC data showed.

“We do not see India’s suspension on cotton exports as enough of a catalyst to propel cotton to another rally similar to the 2010/11 surge that peaked well over $2 a lb,” Gary Raines, the chief economist for Fibers and Textiles, of FCStone in Memphis, Tennessee, told Reuters in an interview.

“Last year’s spike was the culmination of a perfect storm of bullish waves that all crashed together at the same time,” he explained. “Today’s market certainly reflects a much different landscape.”

DOUBTS RAISED IF U.S. CAN REPLACE INDIAN COTTON

Most of India’s cotton exports are shipped to its northern neighbor China, which is the world’s biggest producer and consumer of cotton for its huge textile and apparel industries.

India is the world’s second biggest producer of cotton, but exports a significant amount of that to its Asian rival where it enjoys a competitive advantage in shorter shipping routes compared to fiber coming from the United States.

India is the top rival of the U.S., the world’s No. 3 producer of cotton and the top exporter of the fiber.

The question facing the U.S. cotton industry is whether there are supplies to be found in the U.S. to take the place of Indian cotton.

“The United States is running out of the current available crop. We have fewer than 800,000 bales left for sale excluding beginning stocks at this point,” a weekly market summary by VIP Commodities said, adding “the U.S. is almost out of cotton.”

Egli estimates the U.S. is basically “sold out” of cotton.

Brokers said that of total U.S. production in 2011/12 of 15.67 million (480-lb) bales, 11.3 million bales has already been sold or committed and domestic mill consumption accounts for 3.5 million bales.

“The cupboard is bare of U.S. cotton,” one said.

Analysts though are skeptical the ban by India would be enough to stoke a sustained rally even if the short-covering spurt lasts a few days or so.

They said demand from China’s mills have slowed down due to the economic crisis in Europe and Chinese stocks are plentiful.

Keith Brown, the president of commodity firm Keith Brown and Co in Moultrie, Georgia, pointed to China cutting its 2012 GDP growth target to 7.5 percent, the lowest in 20 years.

“It is obviously a friendly piece of news but it (may not) last,” he said.

U.S. Agriculture Department’s monthly supply/demand report pegged China’s 2011/12 cotton imports at 17 million (480-lb) bales. China has been a heavy buyer of U.S. cotton in the weekly USDA export sales data, but the amount slowed down in the last report.

Brown said that is the reason why the rally was confined to the old-crop May and July cotton contracts <0#CT:> because large supplies are expected when the new crop is priced against the December contract.

(Reporting by Rene Pastor; Editing by John Picinich)

Source: http://www.reuters.com/article/2012/03/05/markets-cotton-idUSL2E8E590L20120305

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