Cotton futures fell to their lowest in two-and-a-half years, sapped by a warning over the potential for China selling down some of its bumper stocks, besides broader market liquidation.
New York cotton for July dropped to 66.10 cents a pound in early deals, the lowest since November 2009, before staging a recovery later in the day.
The early decline came on a further day of liquidation in financial markets, sapped by concerns for the trio of Chinese, European and US economies.
"The outlook for global fibre demand continues to deteriorate, and prices are following suit," Luke Mathews at Commonwealth Bank of Australia said, flagging the significance for an industrial, rather than food, commodity of "ongoing liquidation across global financial markets".
In China, the top cotton producer, consumer and importer, the benchmark January lot fell down the exchange limit of 4.0% on the Zhengzhou exchange.
Bumper supplies
The drop also followed a further loosening by the International Cotton Advisory Committee, an influential intergovernmental group, of its forecast for world cotton supplies in 2012-13.
World stocks will close 2012-13 at a record 14.46m bales, 170,000 bales higher than previously forecast, the ICAC said, cutting its estimate for world consumption.
"By the end of July 2013, global cotton stocks would represent 61% of global consumption, the highest stocks-to-use ratio reached since 1998-99," the committee said.
The stocks-to-use ratio, in signalling the availability of supplies of a commodity and so the extent of competition for supplies, is a key pricing metric, although the group also flagged the influence of economic fears, and the "arrival of rains in Texas", the top US producing state, in weakening prices.
China sell-down?
However, the committee also gave weight to recent market rumours that China, responsible for 75% of the 4.0m-tonne rise in world stocks in the current, 2011-12 season, which closes next month, may sell part of its inventory.
The sell-off would clear way for 2012-crop cotton, for which the government has offered a slightly higher minimum support price, and is "expected to buy part of the crop".
"A portion of the national reserve might be auctioned before the arrival of the new crop, to rotate stocks," the ICAC said.
Even so, Chinese inventories may rise further overall in 2012-13, with longer-term pricing implications.
"Price volatility may increase due to the uncertainty related to the Chinese national reserve."
'Risks being ignored'
Monday itself demonstrated significant price volatility, with New York's July contract recovering from its early low to end at 68.53 cents a pound, down 0.1% on the day, if still a 27-month closing low.
Commerzbank said that, despite the ICAC's comments, it was "sticking with our assessment that… risks which could spark price rises are currently being ignored.
"The aforementioned risks concern acreage being cut further and demand rising on the back of low prices."
