Cotton prices broke new highs on Monday morning, despite at trim to global deficit expectations.

In a monthly report out on Friday, Cotlook lowered its forecast for the world cotton deficit, the extent to which demand outstrips supply, to 1.24m tonnes, from 1.58m tonnes.

Prices are supported by brisk Chinese buying, but analysts warned that the rally may not have further to run.

Disappointing consumption…

"Production continues to surprise to the upside and consumption growth disappoints," said Tobin Gorey, at Commonwealth Bank of Australia.

But despite the trim to deficit predictions, Mr Gorey noted that "buying momentum has remained resilient".

March cotton futures in New York rose to 75.32 cents a pound in early deals, the second highest level since August 2016, although they later eased to 74.70 cents, down 0.2% on the day.

"And we suspect the trade, having sold aggressively into the rallies, is now worried about being caught short," Mr Gorey said.

… but 'stellar' cotton demand

"Amazingly strong Chinese demand for US cotton is currently lending support to the cotton price," said Commerzbank.

"There is no doubt that demand for US bales for export is stellar, well exceeding our expectations," said analyst Louis Rose.

But Mr Rose warned of rising stocks, as "the large US harvest of high quality cotton seems to have enticed mills to stock up, with merchants likely attempting to push bales out the door for lack of carry in the market".

"Unfortunately for producers still holding 2016 crop, US merchants are well stocked, and the incentive to add inventory in the spot market is limited."

And Commerzbank noted "increasing survey results indicating that US farmers are planning to noticeably expand their acreage for the 2017-18 crop".

"In other words, there are definitely arguments against any further increase in prices," Commerzbank said.

Heavy net long positions

Commerzbank also noted the increase in long positions held by managed money traders, after falling briefly back from a record high.

"These investors are betting heavily on further price rises, in other words."

But Mr Gorey said the size of the long positions was threat to prices, and "warrants keeping a close eye on".

"Prices are now pushing up to levels not traded since last August and there is large potential selling waiting in the wings," Mr Gorey said.