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Cotton prices to fall in 2017-18, even as stocks dip, says ICAC

Cotton prices will retreat next season, despite a drop in world inventories, the International Cotton Advisory Committee said, entering the market debate on the impact of a forecast surge in US sowings.

The ICAC, in its first forecast for average cotton prices in 2017-18, pegged them at 73 cents a pound, as measured by the Cotlook A index of physical values which, in including an element for transport, tends to trade at a premium to much-watched New York futures.

Prices at that level would be 5 cents lower than the 78 cents a pound expected for 2016-17, on an August-to-July basis, and bring to an end the recovery from the multi-year low of 70 cents a pound recorded last season.

The forecast comes amid some uncertainty in cotton markets, as investors consider the impact of contrasting influences of strong demand for US exports of the fibre, but the prospect of a surge in the country's plantings this year.

The US Department of Agriculture, in a much-watched report on Friday, pegged US cotton plantings this year at 12.2m acres – a rise of 21% year on year, and some 800,000 acres more than investors had expected, according to a Reuters poll.

'Production to remain unchanged'

The ICAC acknowledged that "high yields and firm prices will encourage farmers in the US to expand cotton area in 2017-18".

Cotlook A prices, by season average

2017-18: 73 cents a pound (ICAC forecast)

2016-17:  78 cents a pound (ICAC forecast)

2015-16:  70 cents a pound

2014-15:  71 cents a pound

2013-14:  91 cents a pound

Source: ICAC

Cotlook A stood at 87.40 cents a pound as of April 3

However, the intergovernmental group nudged higher by only 100,000 tonnes its forecast for US cotton output this year, leaving it on a par with 2016 production, which was supported by an unusually low proportion of crop abandonment and an elevated yield.

"Production is expected to remain unchanged from 2016-17 at 3.8m tonnes [17.5m bales] as the average yield is assumed to be closer to the five-year average," the committee said.

Indeed, the ICAC trimmed by 110,000 tonnes to 16.55m tonnes its forecast for world inventories at the close of 2017-18, citing a small increase to 24.4m tonnes in the estimate for consumption next season, spurred by the prospect of weaker prices.

"Global consumption may recover by 1% in 2017-18… as cotton prices decrease, and growth in the global economy is expected to be much stronger in 2017 and 2018."

'Correction potential'

The ICAC's comments come amid significant debate among cotton investors over the significance of the US sowings data, which Rabobank termed a "strong bearish signal" for futures.

"With cotton prices particularly attractive against alternative row crops, the market anticipated the increase, but certainly not to the extent of the USDA," the bank said.,

The sowings estimate suggested "potential" for US cotton stocks at the close of 2017-18 "to reach some 7m bales, the highest since 2007-08, through the incidence of a trend yield".

Commerzbank said that after the USDA plantings figure, "it is more likely that the 2017-18 crop year will see a marked rise in the US cotton crop", a factor which could provoke selling pressure as speculators unwind a near-record net long in futures and options in the fibre.

"Correction potential… is likely to have materialised by now," Commerzbank said, adding that this "points to another price fall in the short term".

'Exit light'

At Commonwealth Bank of Australia, Tobin Gorey also flagged the potential for hedge funds to exit, assuming futures - which in the last session recorded their biggest fall in six months – continue to struggle.

"We suspect momentum investors, with a near-record investor long position, currently swing considerable weight in the cotton market," Mr Gorey said.

"Consequently our concern of late has been the market's slowing upward price momentum. As momentum fades, some investors will start to see the exit light flashing on their dashboards."

Nonetheless, New York cotton futures for May stood at 75.59 cents a pound in early deals on Tuesday, a rise of 0.2% on the day, although down 1.2% from the level they were trading at in the run-up to the US sowings data.

New crop December cotton futures traded at 73.81 cents a pound in early deals on Tuesday, a rise of 0.5% on the day – and up 0.2% since before the US sowings data were released.

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