How to tackle the contradictions in the cotton market? Spreads may provide the answer.

Friday presented another apparent inconsistency in the fibre's pricing.

Investors - having been presented on Thursday with a set of US Department of Agriculture crop revisions raising world supply estimates, and so reducing prospects for prices – put New York's benchmark December cotton contract on course to end the week with a limit-up performance.

The lot stood the full 4.0 cents, or 4.1%, higher allowed by the exchange in late deals, at 100.52 cents a pound.

Disbelief? 

Some detected the hand of scepticism over the USDA forecasts, which projected a more rosy view of the American corn yield, despite the drought in Texas, which produces roughly half the US crop.

Indeed, at 822 pounds an acre, the domestic yield was pegged at its fourth-highest ever.

"Price action would suggest the market had difficulty in believing the latest USDA estimate," Paul Deane at Australia & New Zealand Bank said.

'Path of least resistance'

Mike Stevens, the veteran cotton analyst, based in Louisiana, noted that trade estimates for the Texas crop were some 10-15% below where the USDA ended up.

"But the USDA has got the resources, it has got the people out there on the ground," he told Agrimoney.com, attributing Friday's rise in cotton to spillover effects from a rising stockmarket.

"Cotton is looking for the path of least resistance, on a day with little volume. Speculators having probing, but around the long side."

Longer-term signs look muddled too, with a so-called head and shoulders pattern on the weekly charts suggesting a bearish outlook, while the 39-month cycle, one of the longer-term trends closely watched by some technical investors, implies a bullish pattern ahead, Keith Brown at Georgia-based broker Keith Brown & Co said.

Telling difference

The answer may be to look at the spread between the December contract and the July 2012 lot, on the basis that outperformance by the near-term lot is a bullish signal – and vice versa.

"The spread may very well be the very thing that tells us which of our simultaneously technical patterns, will ultimately win out," Mr Brown said.

"Weakness in the spread should tip the scales in the favour of the Bears, allowing 85-cents-a-pound December cotton to become a reality. Yet strength in the spread might confirm the 39-month-cycle low is truly set."

On Friday at least, bulls had the upper hand, with the July lot lagging, rising by 3.06 cents to 96.70 cents a pound.