Cotton futures are to retreat into 2018 more significantly
than investors are factoring in, sapped by rising world production – although reviving
economic growth stands to raise demand further ahead.
Rabobank said that for now, cotton prices look poised for
more of the sharp moves which saw futures soar 14% in three sessions in mid-May
to a near-three-year high, only to give back nearly all that found over the
The bank, citing the steep hedge fund involvement in cotton,
forecast "continued volatility on nearby July futures", before the contract
later in June begins its expiry process.
"Managed money has become a large component of New York]
futures trading – recently making up 40% of total open interest.
"This is one of the largest– if not the largest – aspect driving
the July futures contract in May."
Prices to drop
However, the switch in August to the 2017-18 season, and the
prospect of a rise in production, would put the dampeners on prices, which look
poised to "fall steadily" to 70 cents a pound in the October-to-December
That is below the 72.62 cents a pound at which the December
contract was trading at on Wednesday.
And 2018 will start "with prices back in the high 60s cents
a pound range", compared with the 72.35 cents a pound being factored in by
The forecast factored in expectation so fa 21% hike to 12.2m
acres in US cotton sowings this year, thanks to the better returns offered to
growers by the fibre compared with the likes of corn, rice, soybeans and wheat.
"India isn't far behind, with expectations that area will
increase 8% year on year in 2017-18, although estimates vary considerably,"
Rabobank said, flagging ideas of a rise in Chinese and Paksitani seedings too.
Most of the additional production - besides that in China, and
an amount equivalent to some 4m bales, the size of Australia's harvest - will
be available to world markets.
"This will weigh on the price" of cotton futures, Rabobank
However, further ahead, the bank also flagged a "positive
backdrop" for demand, boosted by world economic growth pegged at 3.65% for 2018
and 3.68% for 2019.
The bank, forecasting cotton demand growth of 1.5% next year
and 2% in 2019, said that expansion would prove "highly concentrated" in developing
Asian markets, bar China.
"Consumption growth in the spinning sectors of Vietnam,
Bangladesh and Indonesia will drive global demand growth."