Societe Generale cautioned investors against adding to short
positions in cotton futures, citing the potential yet for the US crop to fall
short of expectations, stating the risks of drought and cooler-than-normal
The bank said that, in a forthcoming quarterly commodities review,
it is poised to make a "rather dramatic cut" to its forecasts for New York
futures in the fibre.
However, with SocGen's current forecasts at 85.68 cents a
pound for the October-to-December period, and 87.39 cents a pound for the first
quarter of 2015 that leaves considerable scope for downgrade before hitting the
Indeed, a crop tour to Texas, the top US cotton-producing
state, had left the bank recommending investors "to be reticent to add to
The comments - which follow the release of data showing
hedge funds have turned net short in New York cotton futures and options for
the first time since November 2012 – reflected concerns over parts of Texas
including the state's Southern High Plains region, responsible alone for some
12% of domestic output.
The tour revealed a "high variability" in crop potential, "both
in terms of stage of development and crop conditions - some fields looked good,
others looked rather bleak," SocGen analyst Christopher Narayanan said.
Plant development was some two weeks behind the typical pace,
thanks to cooler-than-normal conditions for a crop which is typically viewed as
benefitting from hotter temperatures than the likes of soybeans, with minimum temperatures
above 70 degrees Fahrenheit (21 degrees Celsius) and maximums above 90 degrees
Fahrenheit (32 degrees Celsius) seen as ideal.
"Risks to watch for include 3-4 day stretches of cooler than
normal temperatures under cloudy skies, particularly in September and October.
"Conditions such as these could reduce yield potential."
'Reticent to add to shorts'
Crops in some areas were also grappling with a dearth of
moisture, requiring rainfall in the next two weeks, "and certainly by the end
of the month" to maintain development.
Official data show that 57% of Texas remains in drought –
above the 44% at the start of 2014 – if below the 88% a year ago.
With some parts in drought for three years, the dearth of
rainfall has reduced to 37% the proportion of cotton in the Texas South High
Plains being irrigated, SocGen said.
The bank said that a recovery in demand, and or a "severe
supply shock" would needed to spark a sustained rally in cotton prices.
However, "we would be reticent to add to existing shorts
given the risks in the Southern High Plains," Mr Narayan said.
If crop risks "came to fruition, we would expect a (perhaps
short-lived) 'pop' to the upside" in prices".
'A little less
The comments come at a time of some stabilisation in cotton
futures which, for December delivery, have risen by 2.4% so far on Ice this
month, after a 14.3% fall in July, when the lot set a succession of contract
Other commentators, including the International Cotton Advisory Committee and John Robinson, cotton marketing specialist at Texas
A&M University, have also turned less downbeat on prices, after their
Dr Robinson said that "after maintaining a months'-long
inversion of old crop over new crop futures, the December 2014 contract continues
to trade below the March, May, July and December 2015 contracts… a move back
towards normal economic relationships.
"That move suggests things might be a little less bearish
for the future, although this interpretation may be a little hasty."
The December 2014 contract closed on Monday up 0.3% at 64.40
cents a pound.