Cotton markets face the threat of a sharp correction – but not yet, analysts at National Australia Bank warned, even as prices suffered their worst fall in a year.
There is a "substantial risk" that farmers in the US, the world's top cotton exporter, may raise the pace of sales and that the speculators who have supported prices will leave the market.
"Given relatively limited liquidity in some of these markets and a high speculative involvement, the cotton market is at risk of coming off quickly," NAB agribusiness economist Michael Creed said.
However, selling pressure was unlikely to ramp until "later in the year", when more will be known about the crop in Australia, the third-ranked exporter in 2009-10.
Indeed, with "strong" demand from China and India, who are enjoying "solid" margins despite the strong market, NAB said it expected prices to remain "relatively high" for now.
Passing storm?
The comments came as New York's December cotton contract closed 4 cents lower at 101.24 cents a pound, the biggest drop for a nearest-but-one lot since September last year, and the maximum drop allowed by the exchange.
The decline defied a 300,000-tonne cut, to 6.7m tonnes, in the China Cotton Association's estimate for China's harvest, a reduction blamed on flooding in some growing areas. The association pegged last year's harvest at 7m tonnes.
With India, the second biggest exporter, on Tuesday revealing it may delay for a month a resumption on cotton shipments, despite a bumper harvest, Sudakshina Unnikrishnan at Barclays Capital retained her positive outlook on cotton prices.
"I would not give too much attention to intraday moves," she said.
Crop deteriorates
Other analysts too have forecast further life in the cotton rally, despite a rise of more than 50% in prices over the past year.
"High prices may choke off demand at the margins, but given the conjunction of several powerful supply-side problems, this is a rally that has good fundamental support," ABN Amro said in a report last week.
Production issues have included the floods which have destroyed vast areas of Pakistan, a major cotton grower, while hot and dry weather has been blamed for a three-point drop last week, to 55%, in the proportion of the US crop rated "good" or "excellent", signalling weaker output.
Rains in the south eastern US this week "could be a problem in areas where bolls are open, which includes over 80-90% of the crop in Georgia, and the Carolinas", Terry Roggensack at the Hightower Report said.
Meanwhile a decision by China to release 400,000 tonnes of cotton from state reserves, suggested that "current, near record price levels are only making a modest dent in usage", he added.
