Cotton futures fell by the exchange limit in New York, hitting a 21-month low, after US farm officials forecast farmgate prices potentially falling to 65 cents a pound, weighed by the biggest inventories in history.

World cotton output will decline by 7.7m bales in 2012-13, sapped by lower harvests in all major producers bar the US and Francophone Africa, the US Department of Agriculture said in its first forecasts for the season.

The Chinese harvest, the world's biggest will drop by 3.0m bales, with that in second-ranked India to decline by 1.5m bales.

The estimates follow a swathe of surveys foreseeing lower cotton sowings this season, following the collapse in prices from last year's record high of 227 cents a pound in New York.

Indeed, the USDA's forecast of a rebound to 17.0m bales in the domestic harvest reflects a lower abandonment rate than last year, when Texas was deep in drought, than any increase in the popularity of the crop with farmers.

Another surplus

Meanwhile, world consumption is seen rising by 3.3% "due to modest growth in both world GDP and cotton's share of world fibre demand, as lower cotton prices relative to polyester improve cotton's competitive position", the USDA said

Even so, it will remain below world production, allowing year-end inventories to break above 70m bales for the first time.

And, as an extra depressant to values, China - whose stockpiling in 2011-12 has underpinned export values – will import, at 14m bales, one-third less of the fibre next season.

Market reaction

The USDA forecast US farmgate prices for this year's cotton crop at 65-85 cents a pound, down from 91.0 cents a pound estimate for the 2011 harvest.

And in New York, the July futures contract closed at 81.82 cents a pound, falling the maximum 4.00 cents allowed by the exchange in a single session, and the lowest for a spot contract since July 2010.

Rabobank analysts said that the USDA forecasts were "bearish for cotton, as supply is forecast to outstrip demand for the third consecutive season in 2012-13, and the global ending stocks-to-use ratio will be hte highest on record".

"As planted area and yield expectations are solidified, and as the risk premium associated with US output erodes in the coming months, we anticipate further downside to new-crop prices."

The new crop December lot also fell limit down, to 79.37 cents a pound.