Cotton futures take gains in two sessions above 10%

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The rally in cotton futures faces “resistance” from price competition with alternative fibres, Rabobank warned, even as prices touched limit up for a second session, boosted by surprise estimates from US officials.

New York-traded cotton futures for December hit 74.78 cents a pound in early deals on Wednesday, soaring the, expanded, 4.0-cent limit on daily price moves set by the Ice exchange.

The surge – which took the contract to a two-year high for a nearest-but-one lot – followed a limit-up move in the last session too, and took price gains in two sessions above 10%.

The contract had eased back to 73.27 cents a pound as of 05:05 New York time (10:05 UK time), although this remained up 3.5% on the day.

‘Caught by surprise’

The price surge was fuelled by a downgrade by the US Department of Agriculture on Tuesday of 3.4m bales to 91.3m bales in its forecast for world cotton inventories at the close of 2016-17, which begins next month.

The downgrade, which took the stocks estimate to a five-year low, was more than double the 1.5m-bale cut expected by analysts.

“While a reduction in global ending stocks was not unexpected given the strong uptake seen at Chinese reserve auctions this year, the scale of the fall appears to have caught the market by surprise,” said Madeleine Donlan at Commonwealth Bank of Australia.

“Ongoing weather concerns in US cotton regions also added to the market’s momentum.”

‘Switch to alternatives fibres’

However, Rabobank, which was been one of the more bullish commentators on cotton, cautioned that the rise in prices could be curtailed by competition with synthetic competitors, such as polyester.

While cotton values worldwide “will be supported by tighter available supplies in major consuming states… higher prices and the subsequent switch to alternatives fibres should provide resistance going forward”, Rabobank said,

Rabobank analyst Charles Clack told Agrimoney: “There may be a move to blend more fibres like polyester into textiles.

“This is not a trend that is likely to happen immediately, bit it is something to look out for in the coming months.”

‘Very strong sales’

The USDA’s lowered forecast for world cotton stocks at the close of 2016-17 reflected in the main a downgrade of 3.0m bales, to 51.7m bales, in the estimate for inventories in China, after success in a programme of auctions designed to run-down huge state stockpiles.

“Sales from China’s State Reserve have remained very strong, despite rising prices,” the USDA said, noting that sales had reached 1.18m tonnes, at a base sales price which has “risen steadily and has reached just under 90 cents per pound”.

“Volumes offered and resulting sales remain at levels consistent with the officially-announced 2m-tonne sales target being met just before the end of August, the announced cut-off for reserve sales.

“With these strong continuing auction sales, and other market data, indicating more mill use than previously thought, USDA has revised China’s consumption forecast up substantially,” by 1.5m bales to 35.0m bales.

‘Concerns over disease and pests’

The USDA also cut its forecast for Indian cotton production in 2016-17 by 500,000 bales to 27.5m bales, thanks to a drop in sowings amid “concerns over disease and pests such as whitefly, late monsoon rains, and lower cotton prices”.

For Pakistan, the harvest estimate was downgraded by 1.0m bales to 8.0m bales, again thanks to a drop in expectations for plantings.

“Growers have sown more corn and sugarcane this season and reduced cotton acreage,” the USDA said.

“Corn and sugarcane producers benefit from tariffs that insulate domestic market prices from the international market, while cotton producers face lower prices and competition from cotton imports.”

‘Sharply higher exports’

For the US itself, the USDA raised the production forecast by 1.0m bales to 15.8m bales, reflecting the higher sowings number unveiled by an official report two weeks ago.

However, the boost to supplies was offset by an upgrade of 1.0m bales to 11.5m bales in the forecast for US cotton exports in 2016-17.

“Exports are projected sharply higher due to the larger US supply and an expectation of continued tight foreign stocks,” the USDA said in its flagship monthly Wasde crop report.

The estimate for the cotton price that US farmers will receive for this year’s harvest was lifted, at the centre of the range, by 2 cents a pound to 59 cents a pound, taking it above the 58 cents a pound estimated for the 2015 crop.

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