Speculators turned their most negative on cotton prices for nearly three years, amid improved ideas for world supplies of the fibre and concerns about the resilience of demand from top importer China.

Managed money, a proxy for speculative cash, slashed its net length in New York cotton futures and options by 15,238 contracts in the week to February 14, data from the US Commodity Futures Trading Commission showed.

The slump left net length – the advantage of long positions which benefit when prices rise over short holdings, which profit when prices drop – at 212 lots, the lowest since early 2009.

And it followed a rash of evidence of cotton supplies easing from the tight conditions which spurred a jump in prices to record levels last year.

Rising supplies

On February 9, the US Department of Agriculture, in its key Wasde crop report, raised its estimate for world supplies of the fibre at the close of 2011-12 by 2.4m bales to 60.8m bales, adding that cotton's "stocks-to-consumption ratio of just over 55% is sharply higher than the past two seasons".

"While it is estimated that around 48% of the total area planted to cotton is in regions affected by floods, the area of cotton crops directly affected by flood water will be smaller, in part because of protection provided by irrigated cotton levee banks," Abares, the official commodities bureau, said.

Meanwhile, data from China National Cotton Reserves Corp showed China's cotton imports falling in January to 326,500 tonnes, down 17% year on year and 59% month on month.

Sowings data

Furthermore, a US survey questioned ideas of a sharp drop in sowings in the US, the top exporter, this year, with the National Cotton Council putting the figure at 13.63m acres, a 7.5% decline.

The fall in speculators' net long cotton position was reflected in prices, which fell by 2.5% in New York during the week to last Tuesday, albeit recovering from a low hit immediately after the USDA report.

While the weak net short position indicates poor sentiment, it also offers solace to cotton bulls.

Not since 2006 have speculators remained net short in cotton for an extended period, raising the possibility that they may have nearly had their fill of selling, and opening up the potential for a strong rally if price-positive news sparks a wave of short-covering.

Out of favour

The sell-down in cotton reflected a theme in agricultural commodity markets during the week, with speculators' overall net long exposure to the sector falling by 1.2% on Standard Chartered calculations.

In Chicago wheat, managed money returned to increasing its bearish stance, also following an upgrade in the USDA's Wasde report to world supply estimates.

Net short exposure soared by 13,572 contracts, to 44,451 lots, heading back towards record levels reached late last year.

Soybeans bucked the trend, with net long exposure raised by 18,186 lots to 81,042 contracts, helped by long-standing fears for the impact of drought on crops in South America, concerns reflected in the Wasde. 

In soyoil, of which Argentina, the epicentre of the drought jitters, is the top exporter, managed money returned to a net long stance.

Investors also turned more downbeat towards exchange traded funds last week, "with outflows of $23m, taking three-month cumulative outflows to $346m, 8.4% of assets under management," StanChart analyst Kuon-Ken Lee said.