Abares lifted its forecast for cotton prices, although to a level a touch below current values, cautioning over "strong competition" from synthetic fibres for mill demand.

The official Australian commodities bureau raised by 3 cents, to 78 cents a pound, its forecast for world cotton prices, as measured by the Cotlook A index, in 2016-17.

The upgrade took the forecast above the 75 cents a pound estimated by the International Cotton Advisory Committee earlier this month.

However, the forecast suggests little scope for cotton prices to extend their recovery from spring lows, with the Cotlook A on Friday standing at 80.05 cents a pound.

Demand vs production

The bureau flagged that world cotton production was expected to fall short of consumption for a third successive season in 2016-17, with year-on-year growth in output undermined by a continued retreat in China's harvest, seen falling by 4% to 4.6m tonnes.

Abares noted a "8% fall in [Chinese] planted area to 2.8m hectares… driven by relatively low cotton prices at the time of planting".

The estimate for world inventories at the close of 2016-17 was cut by 500,000 tonnes to 19.1m tonnes, a drop of 1.9m tonnes year on year.

The bureau noted a "significant decline in the world stocks-to-use ratio for cotton in 2016-17", of 8.7 points to 78.0 points - the stocks-to-use ratio, in indicating the relative demand for supplies, being seen as a price indicator.

Cotton vs polyester

However, Abares also cited limits to the extent to which cotton prices can recover before tipping notable demand over into rival fibres

"Growth in world cotton consumption is expected to be constrained by forecast increases in cotton prices and strong competition from polyester and other synthetic fibres.

"Lower world oil prices in recent years have lowered polyester prices and increased its price-competitiveness."

In fact, the comments came as oil futures extended their recovery, helped by an agreement by non-Opec producing countries to output cuts, with Brent crude earlier on Monday topping $57 a barrel for the first time in 17 months.

Brent crude in late deals stood at $56.05 a barrel, a gain of 3.2% on the day.

'Dips should be well supported'

Abares' revisions contrast with an upgrade by the US Department of Agriculture on Friday to its estimate for world cotton stocks at the close of 2016-17, by 184,000 tonnes to 19.41m tonnes, reflecting increased estimates for US and Australian production.

The US harvest was upgraded by 79,000 tonnes to 3.60m tonnes, "due to an increase for Texas", the country's top cotton-growing state, "which is partially offset by decreases for the Carolinas".

However, cotton futures on Monday more than recovered ground lost on Friday, after the USDA revisions, which were made in the department's flagship monthly Wasde report on world crop supply and demand.

"Despite the drop in futures [on Friday] the upward trend still remains intact," said Australian traders at Ecom.

With "large on-call sales positions, meaning futures must be bought to fix sales prices, and a large trade short position, any market dips should be well supported in the near term".