Cotton futures are testing new three-year highs, as speculators again turn bullish on the fibre.

July cotton futures reached highs of 79.63 cents a pound in early deals. This was slightly below the highs reached in intra-day trades on two sessions back in March, but was higher than any close for the second-month contract since April of 2014.

Momentum has returned to old-crop cotton futures, despite ideas of a heavy new-crop to come, as speculators ramp up bullish positions.

Hedge funds turn bullish

The net-long position held by managed money funds, which is treated as a proxy for speculator sentiment, grew to record levels back in mid-March, of 106,034 lots. 

This position then rapidly over the space of a few weeks, but sentiment swung more positive again over the last reported week, back to 83,370 lots. 

"As the data only cover the period up to last Tuesday, it can be assumed that further net long positions have been built up in the meantime, thereby lending support to the latest price rise," said Commerzbank.

Gaining momentum

Tobin Gorey, at Commonwealth bank of Australia, said the data suggested that "investor sentiment had shifted from selling back to buying".

This recovery of momentum could prove supportive for prices.

"Prices are looking like they may test recent highs, so the market once again looks solid on most momentum measures," Mr Gorey said. "Momentum investors are likely to be lured back in."

Good exports, strong old-crop demand

Commerzbank said the recent rally was "driven up by good US export figures, which repeatedly prompted the USDA to upwardly revise its 2016-17 export figures".

"This also ties in with reports that China's cotton imports were 146% higher year-on-year in March, with imports up by a not inconsiderable 67% in the first quarter overall."

"Strong demand for old crop US cotton continues," agreed Mr Gorey.

No shortage expected

But Commerzbank also noted that fundamentals did not suggest any shortage of cotton.

"There are hopes of a good crop in India because a normal monsoon is forecast and acreage has been increased."

"The US is also expected to harvest a larger crop in 2017 than last year."

A global production deficit is expected in 2017-18, but all the stock shrinkage will be down to inventory drawdown in China, while stocks elsewhere are expected to go.

But prices with momentum leading to the upside, Mr Gorey suggested that "heavy new crop fundamentals, for now at least, appear to be a second order issue."