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Cotton futures ease, weighed by hedge fund bets
By Agrimoney.com - Published 04/02/2013

Cotton prices eased on Monday after global experts raised estimates for supplies of the fibre, at a time when hedge funds large bets on rising prices raised questions over the appetite for further long positions.

The International Cotton Advisory Committee raised by 231,000 tonnes, to a record 16.7m tonnes, its forecast for world cotton inventories at the end of the 2012-13 season, in July, reflecting a weaker estimate for consumption.

Cotton demand in China, the top consumer, is being suppressed by price support system which, while helpful to farmers, is weakening the competitiveness of mills, and prompting textile groups to look abroad for yarn.

The estimate for world inventories as of the end of next season was lifted by an extra 360,000 tonnes on top, as the ICAC lifted its forecast for world production albeit seeing the crop down 10.6% year on year - while, again, cutting consumption hopes.

Reasons for caution

The idea of even larger world cotton supplies, even if largely stored in Chinese state stockpiles, added to negatives which slowed the rally in New York futures on Monday which made the fibre the top performer in commodities last month.

Speculators' net longs in New York softs, Jan 29, (change on week)

Cotton: 53,295, (+11,690)

Cocoa: 15,326, (-3,316)

Raw sugar: -5,893, (+12,409)

Coffee: -10,516, (+690)

Sources: Agrimoney.com, CFTC

New York's March contract stood 0.4% lower at 82.65 cents a pound at 06:30 local time (11:30 UK time).

Stocks of cotton certified for delivery against New York futures have been on the rise, reaching 137,381 bales as of Friday, up more than 25,000 bales in a week.

Furthermore, China whose high prices, even in sales of cotton from state inventories have continued to underpin US exports - is approaching its lunar new year celebrations, expected to prompt a dip in demand.

Speculative positioning

Separately, data from the Commodity Futures Trading Commission, the US regulator, late on Friday showed managed money, a proxy for hedge funds, hiking its net long position in New York cotton futures and options above 50,000 contracts to the highest since October 2010.

Speculators' net longs in grains and oilseeds, Jan 29, (change on week)

Chicago corn: 164,434, (+12,927)

Chicago soybeans: 105,017 (+7,223)

Chicago soymeal: 35,952, (-406)

Kansas wheat: 15,220, (-1,633)

Chicago soyoil: -2,714, (+7,282)

Chicago wheat: -17,676, (+3,232)

Sources: Agrimoney.com, CFTC

Extreme positioning by speculators often encourages profit-taking, in raising concerns over whether the wave of hedge fund positioning has run its course.

Managed money, which in mid-November held a hefty net short position in cotton futures and options, has now raised its net long position by 30,000 contracts in three weeks.

In raw sugar, in which speculators raised their net short holding as of January 22 to the highest since at least 2006, the extent of the position encouraged huge short-covering in the latest week, of more than 12,000 contracts.

Chicago purchases

Managed money cut some of its net short position in Chicago wheat too, reducing it to the lowest in a month.

However, positive sentiment was more evident in Chicago corn and soybeans, in which growing concerns over South American weather prompted speculators to raise net long exposure.

Dryness is prompting downgrades to hopes for Argentina's corn and soybean harvests, while rain, while underpinning yield hopes in Brazil, is hampering harvest and crop movement, dashing hopes of a strong level of early export supplies.

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