Cotton price correction 'may be past its worst'

Analysts offered hope to battered cotton bulls, with Commerzbank nudging higher its forecast for futures, citing the threats to production from the southern US drought, Chinese reforms and, potentially, El Nino too.

Commerzbank acknowledged the threats to cotton prices from "softer demand" from China, the top consumer and importer, and from the prospect of some inventory rebuild in the US, the biggest exporter.

Indeed, it forecast prices averaging 78 cents a pound in the October-to-December period, when new crop northern hemisphere supplies come onstream, compared with 89 cents a pound expected in the current quarter, when the US is relying on thin stocks left over from the last harvest.

However, the fourth-quarter forecast represented an upgrade of 4 cents a pound from its previous outlook, with the estimate for prices in the January-to-March quarter also raised by 4 cents, to 76 cents a pound.

'Several downside risks'

The improved outlook reflected "several downside risks" to production hopes, including the drought in Texas, the top US producing state, the bank said.

The US Department of Agriculture forecast of 24% of domestic cotton sowings being abandoned "is much more than on average of the past 15 years", if below the 2011 record above 35%.

Although rains over the past week are believed to have eased the Texas drought, high rainfall itself could yet prove a problem, Commerzbank added, noting the prospect of an El Nino weather pattern,

"The weather phenomenon El Niño could cause additional harvest losses because it goes hand in hand with above-average rainfall in the south of the US during the harvest period."

Meanwhile, Chinese output will drop, a reflection of subsidy reforms which are handing payouts only to growers in Xinjiang, the country's top cotton-producing province.

Price outlook

The cotton price "should remain elevated until the new harvest comes to the market," Commerzbank said.

"For this reason we forecast a price of about 85 cents per pound until autumn."

Then rising US stocks, and softened Chinese demand, "suggest that the price will decline to 78 cents per pound by year-end", likely falling below that in 2015, unless an El Nino causes significant disruption.

"Should the drought or El Nino cause massive harvest losses in the US, 80 cents per pound ought to mark the lower end of the range for the cotton price."

The forecasts imply that the worst may be over for the retreat in cotton prices fuelled by Texas rains, which have improved conditions for US sowings of spring crops.

Indeed, new crop December cotton edged 0.1% higher to 77.78 cents a pound in New York as of 06:40 local time (11:40 UK time) – taking aim at what would be a first positive close in 13 sessions, during which it has lost 7%.

The contract on Wednesday touched 77.00 cents a pound, a three-month low.

Old crop July cotton stood 0.2% higher at 85.06 cents a pound.

'Priced in'

The prospect that the cotton correction may have run its course for now also received support from Citigroup analyst Sterling Smith, who said that "the improved weather and better planting conditions look to be priced in at this point.

"The crop in west Texas will need to see better follow-up precipitation, or the improved starting conditions will likely go for naught."

At Price Futures, Jack Scoville said that "it is now more possible for the US to have a good to very good crop this year, although there is still the growing season in front that will need to feature continued very good weather".

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