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US cotton stocks upgrade weakens price hopes

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Leading cotton analyst John Robinson cut his forecast for prices of the fibre for a second successive month, seeing scope for further falls, after the US unveiled "very bearish" supply and demand estimates.

Dr Robinson, cotton marketing specialist at Texas A&M University, who a month ago cut his forecast for 2014-15 future prices from 75-87 cents a pound to 72-82 cents a pound, reduced it further, to 65-77 cents a pound.

The forecast reflected revised estimates in the US Department of Agriculture's July Wasde crop report, released on Friday, which he termed "very bearish, with almost a 3m-bale increase to projected 2014-15 ending stocks".

The Wasde lifted its estimate for world cotton inventories at the close of the season starting next month from 102.72m bales to 105.68m bales – equivalent to nearly one-year's consumption, and a revision influential KCG Futures cotton specialist Sharon Johnson also termed "very bearish".

Dr Robinson's forecast compares with a price of 68.36 cents a pound for New York's best-traded December cotton contract on Monday, up 0.4% on the day, already near the bottom of the forecast range.

'Downside risk is substantial'

Nonetheless, with China potentially poised to sell down some of its huge inventories, estimated by the USDA at 61.3m bales as of the end of this month, "the upside rise [to prices] is capped and the downside risk is substantial", he said.

Indeed, noting the USDA forecast of US farmgate cotton price of 60-76 cents a pound, a marginal downgrade from the previous forecast of 60-80 cents a pound, Dr Robinson said that "I only hope that a 60-cent average farm price is [really] the low end of that range".

At 68 cents a pound, the mid-point of the USDA's price range, US farmers would receive their lower values for their cotton in five years.

'Weaker futures prices'

The USDA revisions to the world balance sheet in 2014-15 reflected largely an upgrade of 900,000 bales to a six-year high of 5.20m bales in the forecast for US inventories.

The revision reflected higher hopes for US production, seen rebounding 28% to 16.5m bales, 1.5m bales more than previously expected, largely thanks to rains in the core southern Plains producing area.

The USDA also raised its estimate for US cotton plantings by 270,000 acres, reflecting the findings of a plantings report published two weeks ago.

"The historical implication of such a month-on-month increase is weaker cotton futures prices and weaker cash prices," Dr Robinson said, estimating at 0.219 cents the drop in potential for farmgate prices for every 1% rise in US ending stocks.

Cotlook A prospects

For the much-watched Cotlook A index of physical prices, which in including an element for transport typically trades at a decent premium to futures, he cut his price forecast to 86.6 cents per pound for 2014-15.

"For every 1% increase in world, excluding China, ending stocks, the A-index would be expected to weaken by 0.706 cents a pound," he said.

The Wasde raised the estimate for world ex-China cotton stocks as of the close of 2014-15 by 1.47m bales to 41.95m bales.


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