Cotton futures set a 17-month high, helped by increasing concerns over the condition of the US crop, and defying doubts over how supportive a downgrade to world stocks estimates will really prove.
Cotton for December delivery touched 91.92 cents a pound in New York, the contract’s highest since March last year, building on gains following US Department of Agriculture cuts on Monday to forecasts for both domestic and world stocks at the end of the newly-started 2013-14.
The USDA in its closely-watched Wasde report lowered its estimate for the domestic cotton crop by 450,000 bales to 13.05m bales, well below the figure of 13.7m bales that analysts had expecting, reflecting weaker yield prospects and a lower estimate for plantings.
The ideas of yield setbacks – which prompted a cut to 2.8m bales in the estimate for US stocks at the close the season, again below market expectations – received support overnight from separate USDA data showing a decline in the condition of the US crop.
The proportion of the US crop rated “good” or “excellent” fell two points over the week to 43%, with particular falls in Alabama, South Carolina and Tennessee.
“Cool, wet conditions in the south have caused slow crop progress. Rainfall has been excessive in many areas,” the USDA said, while dryness has been a concern in the top growing state of Texas.
On the global stage, the USDA cut its forecast for production by 1.6m bales to 116.4m bales, reflecting also a 1.0m-bale downgrade to the Chinese crop, the world’s biggest.
The Chinese downgrade reflected “unfavourable” weather in Xinjiang, the country’s top cotton-producing province, where northern areas have sustained “heavy rainfall and hail damage”, and in Hebei and Shandong, which have also received unusually strong rains.
The USDA lowered by 540,000 bales to 93.8m bales its forecast for world cotton stocks at the close of 2013-14 which began at the start of this month.
‘Record large stocks’
The apparently more bullish data attracted some caution from analysts nonetheless, with Luke Mathews at Commonwealth Bank of Australia noting that “this remains a record large global cotton carryout result”.
And veteran soft commodities analyst Judith Ganes Chase flagged that downgrades to China’s crop may not signal extra buying, given that the country already accounts for more than half the world;s cotton inventories.
“With opening stocks of 50m bales, even if China’s cotton production is slashed, it does not necessarily mean that the world’s top producer and importer will buy any more cotton,” she said.
“If the Chinese crop is reduced, it tightens up the world balance, but the market has not been trading on that otherwise prices would have been at least 20 cents a pound lower.”
Values have instead reflected the squeeze on inventories outside China’s, whose own stocks are deemed unavailable to the world market.
Cotton vs grains
Further ahead, Ms Ganes Chase, at J Ganes Consulting, also flagged the potential for resilient cotton prices, at a time of falling grain prices, to encourage farmers to raise plantings of the fibre.
“A late summer rally and higher prices in the fall could get farmers to start thinking about planting cotton again,” she said.
“A quick check of cotton prices relative to the two most competitive crops in the fight for acreage, soybeans and corn, shows that cotton could win out if the price relationship continues this way into the spring.”
However, New York’s December cotton contract recovered from an early wobble to stand up 1.9% at 91.80 cents a pound in late morning deals, lifted by talk of more rains for the US South.
Furthermore, stocks held for delivery against New York futures fell to 51,674 bales as of last night, the lowest since November and down levels close to 600,000 bales a month ago, a factor Ms Ganes Chase acknowledged as support for prices.
“The lower the certificated stocks, the higher the market responds, and this has been helping to prop up the December contract at an increasing premium to the more distant months,” she said.
Cotton for July 2014 delivery stood 1.4% higher at 86.20 cents a pound.