The start by China of the sell-down of a small amount of its huge cotton reserves overshadowed a, cautiously, positive reaction to US data on the fibre to snuff out ideas of a rise in futures.

New York's March cotton contract, which rebounded in the last session more than 2% from its intraday lows, eased on Monday after China unveiled the start of sales from its state reserves, which the International Cotton Advisory Committee sees potentially hitting 10m tonnes.

The sale, of 40,145 tonnes, represented only a small portion of the stocks, and China had been long forecast to make some disposals, if only to clear space for purchases from the domestic market.

China is attempting, through intervention, the difficult balancing act of supporting cotton returns to farmers while keeping prices low enough so as not to damage the competitiveness of domestic mills, although many of these have struggled with the country's prices.

China dynamics

The sale offered a reminder to investors of the huge level of Chinese stockpiles, the handling of which has been widely named as the greatest uncertainty in the world market.

Indeed, the US Department of Agriculture on Friday, in the latest edition of its much-watched monthly Wasde crop report, raised by 653,000 tonnes to 8.84m tonnes its forecast for China's overall stockpiles as of the close of 2012-13 – half of the world total.

The upgrade reflected increases to ideas both for China's domestic production and imports – despite no boost to consumption.

The USDA said of its harvest upgrade that "record yields in north west China are expected to offset yield reductions in eastern China, which suffered from excessive rainfall and typhoon damage during the latter part of the growing season".

The upgrade to import estimate was "due to strong imports to date and tight free stocks resulting from the large accumulation of cotton in the national reserve".

Texas downgrade

The imports are being sourced largely from the US, the top cotton exporter, whose shipments for 2012-13 were upgraded by 87,000 tonnes to 2.66m tonnes.

The forecast for stocks at the close of 2012-13 was cut by 131,000 tonnes to 1.05m tonnes, reflecting also a cut to the harvest forecast.

"A 500,000-bale reduction for Texas, due to larger estimated abandonment, is partially offset by increases in other states," the USDA said.

'Mildly supportive'

The data were viewed as "mildly supportive" by Commonwealth Bank of Australia analyst Luke Mathews, although he cautioned that "bullish sentiment is tempered by soft global cotton demand, increased global production and record-large global cotton stockpiles".

"The USDA tightened their US cotton supply forecasts, although the global cotton balance sheet remains sloppy," Mr Mathews said.

Rabobank termed the data "mixed", with the tighter outlook for US supplies contrasting with the looser world picture.

"While the outlook for the old crop remains that of oversupply, the market's focus in the next quarter will be on US planted area and new crop prospects," the bank added.

New York cotton for March delivery closed down 0.1% at 75.52 cents a pound.