Cotton price ‘upside limited’ despite spec clamour


A jump in hedge fund bets on rising cotton prices has not erased concerns over the fibre prompted by high global inventories, Commerzbank said, even as prices made a firm start to the week.

Managed money, a proxy for speculators, raised its net long position in New York cotton futures and options by nearly 20,000 contracts to 21,666 lots, data from the Commodity Futures Trading Commission (CFTC) late on Friday showed.

The increase, the biggest jump since at least 2010, took the net long position – the advantage of long positions which profit when prices rise over short holdings which benefit when futures fall – to its highest since January, when prices were some 30% above current levels.

“There has been a shift in sentiment on the cotton market in recent weeks,” Commerzbank said.

“Just under three weeks ago, the majority of speculative investors were still betting on falling prices.

“In the following week, the CFTC already revealed that positioning was net long. In the week to October 23 this has now been topped up.”

‘Could prove an interlude’

However, the revival in sentiment “could prove to be merely an interlude”, given that a dip – thanks to US harvest delays and a poor quality crop – in levels of supplies certified for delivery against New York futures at the heart of the change looks to be temporary.

“Early US crop analyses had suggested that quality problems might result in poor processing capability, with the result that short [futures] positions were increasingly covered,” Commerzbank said.

Furthermore, prices, which dropped nearly 6% last week, were set to remain under pressure from huge global inventories.

“In principle, it remains the case that the year 2012-13 which has now started is likely to show a surplus of roughly 10m bales (ie 2m tonnes) for the third time running.

“Upside price potential is limited in the medium term.”

‘Chinese policy distortion’

Indeed, many analysts remain puzzled as to why cotton prices are not far lower, given the extent of world supplies, expected to end 2012-13 with sufficient coverage for nine-months’ supplies.

At Texas A&M University, cotton marketing expert Professor John Robinson said that “the price puzzle may have a large number of pieces, not the least of which is Chinese policy distortion”.

China, the top cotton consumer, producer and importer, is propping up domestic values through a price guarantee scheme for farmers.

‘Shredded rather than harvested’

However, Professor Robinson sounded a bullish note for prices too, cautioning over further potential setbacks to ideas of the cotton harvest in the US, the top exporter.

“I still expect some very low-yielding acreage to be assessed by crop insurance adjustors and shredded rather than harvested,” he said.

“I have already witnessed this in the Coastal Bend, and I wouldn’t doubt it will happen in the Rolling Plains and South Plains regions.”

US Department of Agriculture monthly Wasde crop reports are set in November and December to cut estimates of the crop in Texas, the top producing state, “a little more from simply reducing the harvested acreage,” if only thanks to higher figure for crop abandonment as farmers plough in fields “with uneconomic yield levels”.

“That might take the US production forecast back toward 17m bales, depending on whether cotton yields in the eastern Cotton Belt continue to be adjusted higher.”

Hurricane threat

In fact, the Virginia crop faces the prospect of damage from Hurricane Sandy, which may make landfall in the state later on Monday.

Cotton in Virginia – hurt last year by Hurricane Irene – is currently the highest-rated US crop, with 94% seen by the USDA last week as being in “good” or “excellent” health.

However, the state is well behind with its harvest, with only 26% completed as of a week ago compared with 44% in a typical year, leaving the crop vulnerable to storm damage.

New York cotton futures for December delivery stood 0.5% higher at 72.78 cents a pound in breakfast-time deals.

Positive positioning

The CFTC data also showed a revival in speculative interest in Chicago corn futures and options, as the approaching end of the US harvest eased pressure on prices.

Managed money’s net long position soared 26,000 contracts to more than 280,000 lots.

Similarly, speculators increasing their net long position in Chicago soybean futures and options for the first time in seven weeks.

Speculators raised their net long holding in Chicago wheat too, by 10,000 contracts, amid growing concerns for the Australian crop currently being harvested, and US winter wheat being drilled in some areas into dry ground.

Source: AgriMoney