* Cotton down over 2 percent on the week
NEW YORK, July 27 (Reuters) – Cotton futures were flat to slightly higher on Friday as fears about a drought in India, the world’s largest producer, and a prediction by Allenberg, the world’s largest cotton merchant, that China will continue to stockpile fibers into next year offset concerns about the global surplus.
Fiber contracts rose over 2 percent in early trade, recouping all the ground lost earlier in the week, but ran out of steam as the euro pared some of its gains versus the dollar with fears about the deepening euro-zone debt crisis returning to the fore.
That took the market down over 2 percent on the week even after the Indian government warned of a possible drought which could hurt crops due to delayed monsoon rains.
The benchmark December cotton contract on ICE Futures U.S. settled at 71.45 cents per lb, almost flat compared with Thursday’s settlement at 71.39 cents.
The Indian authorities’ caution on Thursday reinforced speculation that the country may restrict exports, although Food Minister K.V. Thomas said there are no such plans in place. The government will review the situation in mid-August.
“India is going to be an issue before long. They’ve had 50 percent of their monsoon rain and that’s disastrous for them,” said John Flanagan, analyst at Flanagan Trading Corp in North Carolina.
The market’s reaction was subdued by the global surplus which will continue to weigh on prices for now, he said.
In fact, it could take as long as two years for the market to work off the extra inventory even if there is a drastic cut in crops in India, he cautioned.
His forecast was more downbeat than comments from Allenberg President and Chief Executive Joe Nicosia earlier on Friday, who predicted that China’s strategic reserve, which already accounts for almost half of 2012/13 stocks, will continue to hoard fibers, helping to offset the overhang of the surplus on the market.
“As long as China continues to build its reserves, the cotton market will be protected from its surplus,” said the chief of the wholly owned unit of trading giant Louis Dreyfus and the world’s biggest cotton merchant and trader.
He also predicted massive erosion in plantings due to soaring grains prices, which will help reduce inventory. U.S. farmers will switch out of cotton and grow more soybeans, which could take 2013/14 plantings back to 2009 levels around 9 million acres, he said. Some analysts have pegged plantings as low as 6 million acres.
The high-profile trader was a panelist in the Ag Market network’s much-anticipated annual radio program from New York.
(Reporting by Josephine Mason; editing by Jim Marshall)