NEW YORK (Dow Jones)--Cotton futures tumbled below $1 Friday to their lowest
level in two weeks, a move analysts said marks what will become a more gradual
correction as the U.S. harvest gets underway.
Cotton for December delivery settled 3.9 cents, or 3.8%, lower at 98.02 cents
a pound, well off the pace of the 15-year highs hit in recent weeks.
Flooding severely damaged the crops of major producers Pakistan and China in
late August, fueling worries of a massive global shortage. With stockpiles
already at multiyear lows, mills worldwide reacted by purchasing cotton earlier
and in larger quantities than normal. The flurry of activity sent prices
soaring, hitting fresh highs four times before peaking at $1.0519 a pound on
Sept. 28.
Prices have fallen just as quickly. Futures locked limit down Wednesday, as
reports of above-average harvests in the U.S., the world's No. 1 exporter, and
India likely signaled the end of worries about acute shortages.
"There was only so long you could hold onto the news in Pakistan," said money
manager Shawn Hackett of Hackett Financial Advisors. "Those fundamentals are
not where they were, and the markets are starting to correct."
He added that the market appears to have switched its focus, choosing to bet
on upcoming harvests rather than continuing to buy on August's losses.
After debate Tuesday over whether India should ban exports to allow local
mills to stock up first, a ministerial panel declared exporters could begin
taking cotton registrations as scheduled Friday, with actual shipments
beginning a month later. The ruling is expected to add between 7.5 million and
8 million bales to what were seen as tight global supplies. Industry newsletter
Cotton Outlook said more than 850,000 bales, at 374 pounds each, were
registered on the first day.
With a robust U.S. crop also currently being harvested and shipped,
production estimates have become more certain. The International Cotton
Advisory Committee forecast Friday that cotton consumption would exceed
production by 13 million bales in the 2009-10 season that ended Thursday.
However, the industry group now projects that supply will outpace global demand
of 115 million bales in the 2010-11 marketing year, albeit by just 1 million
bales.
This shift away from earlier estimates for two consecutive years of deficits
is what has prices unraveling.
"Cotton is more overbought than was the case in the past 25 years," First
Capitol Group's Sharon Johnson said in a note to clients.
Analysts estimate prices could fall back into the 80-cent range as mills
replenish supplies and slow the pace of their buying. That level is still
higher than last year, when futures peaked in December at 76.58 cents a pound.
Production still has room to grow, which should narrow the use-to-demand gap
and pressure prices over time, Flanagan Trading Corp. president John Flanagan
said.
"We've seen demand crises happen about once a decade, so it's not all that
unusual," he said. "World production will rise enough to satisfy the demand."