Distant cotton futures better bet than nearby lots

More distant cotton futures may represent a better bet than near-term lots, Rabobank said, entering the debate on prices of the fibre, as New York's spot contract extended its winning spree, hitting a six-month high.

Rabobank, expanding on a forecast last week that cotton prices would enjoy a strong finish to the year, said that its outlook reflected ideas of a further drop of 10% in world cotton sowings for 2013-14.

"Strong competition for land from other row crops, and a low production profitability outlook, are expected to result in global cotton production falling for the second consecutive season," Rabobank said, forecasting a slide in global output to 102.2m bales.

The decline factors in a 19% drop in US plantings, to a four-year low of 9.99m acres.

 "Cotton seed sales have been dismal in the US," the bank said.

'Key bullish factor'

The decline comes against a background of "modest" growth in cotton demand, remaining "hampered by weak macroeconomic conditions and modest apparel sales in 2013-14".

Rabobank cotton price forecasts

Q1 2013: 78.0 cents a pound

Q2 2013: 75.0 cents a pound

Q3 2013: 75.0 cents a pound

Q4 2013: 78.0 cents a pound

Prices: quarter average, spot New York contract

Nonetheless, with Chinese cotton imports to remain significant, if well below last season's bumper levels, the market will see a "significant reduction in the exportable supply of cotton", the bank said.Ending stocks in the main exporting countries, a dynamic which in agricultural commodities tends to have an unduly strong impact on prices, will fall by 24% next season.

"This dynamic is a key bullish factor, and the expectation of falling exportable supply will likely encourage investor buying.

"In 2013, we expect the shift from large inventories of cheaper exportable cotton to more expensive, and not-readily-available, importer inventories to be the catalyst for cotton prices moving higher."

Backwardation becomes contango

Upward pressure will be mainly felt by further-ahead lots, gaining support from the tighter supplies ahead.

"We expect backwardation of the New York forward curve," which saw the March contract on Thursday gain a premium to the May lot, which has in turn run up a small premium over the December contract, "to move towards contango as it becomes clearer that new-season cotton supplies will be diminished," the bank said.

"Growing exchange inventories and a 9% increase in the [2012 US] domestic crop suggests no near-term shortage."

The discount in futures for 2013-harvest cotton to contracts for old-crop supplies "is not sustainable, and we anticipate higher prices for the December 2013 contract".

Chinese imports

The forecast of Chinese imports remaining significant is based on the expense of domestic supplies compared with buy-ins.

Rise and fall of Chinese cotton imports

2013-14: 7.0m bales (R)

2012-13: 13.0m bales (R)

2011-12: 23.7m bales (R)

2010-11: 12.0m bales

2009-10: 10.9m bales

2008-09: 7.0m bales

Sources: Rabobank (R) and USDA

The 800,000 bales of cotton China sold from reserves last week average 19,179 yuan a tonne, equivalent to about 140 cents a pound, some 60 cents a pound above international prices.

"Chinese imports are forecast to fall 45% in 2012-13, but still represent 34% of global trade as the nation continues to absorb global stocks," Rabobank said, if forecasting a further sharp decline, to 7.0m bales, in 2013-14.

Cotton for March stood 0.6% higher at 80.92 cents a pound in mid-morning deals in New York, with the May lot 0.3% higher at 80.93 cents a pound.

The December contract added 0.2% to 79.90 cents a pound.

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