Cotton futures set a fresh two-month high in New York, after a 3% jump in prices in China overnight, encouraged by a downgrade to a key world supply forecast, and concerns over the crop losing out in farmers' sowings plans.

Cotton futures for May touched 62.20 cents a pound in early deals in New York on Wednesday, the highest for a spot contract since early February.

The gain also took the lot within 0.1 cents a pound of its 200-day moving average, a key technical indicator above which it has not closed this year.

And it continued a round of price rises on major world markets, with May cotton futures adding 1.5% on India's Ncdex exchange, while settling up 3.2% at 11,230 renminbi per tonne on for the best-traded September contract on China's Dalian exchange.

Inventory downgrades

The gains took above 6% the rebound in New York prices so far this month - with the Dalian contract now up 9.7% for April.

And they followed downgrades late on Tuesday by the US Department of Agriculture, in its benchmark monthly Wasde crop report, to estimates for both domestic and global cotton stocks at the close of 2015-16.

The forecast for US carryout inventories was trimmed by 100,000 bales to 3.50m bales, reflecting a while the estimate for global season-end stocks was cut by 1.12m bales to 102.2m bales, a revision down also to improved expectations for Pakistani demand.

"Strong textile exports, especially of apparel and bedwear, have forced Pakistan's textile sector to look to imported cotton, especially from India, to make up for a significantly smaller [domestic] crop," USDA officials said.

'Step in the right direction'

The USDA's world cotton stocks figure – while now downgraded to a three-year low – still represents a historically high level of supplies.

"The [Wasde] report was a step in the right direction, but the global market remains heavily supplied," said Tobin Gorey at Commonwealth Bank of Australia. 

However, the revisions nonetheless offered support to prices, in underlining expectations of curtailed US supplies, now seen falling 200,000 bales year on year, which had been signalled by ginnings data.

Rabobank analyst Tracey Allen said: "It was important to have the US stocks cut confirmed, following ginnings results in the last couple of months which suggested a smaller US crop" last year.

Battle for acres

And prices were also gaining support from the rise in values of other crops, notably soybeans, which are rivals in US spring sowings programmes.

Chicago soybean futures, which for May delivery hit a fresh eight-month high on Wednesday for a spot contract of $9.49 Ό a bushel, "are providing a bit more support for the cotton market", Ms Allen told Agrimoney.com.

"Soybeans are one of the main competitor crops for cotton in the US South" in terms of the battle for area in farmers' planting plans.

New York futures, which remain a little shy of year-ago levels, are also curtailing expectations of large crops in many other producing countries, such as Australia and Brazil, too.

"Prices are not conducive to large cotton crops around the world," Ms Allen said.

Hedge funds wrong footed

The rally in cotton is seen as gaining extra pace thanks to a scramble by speculators - who had bet on further price falls - to close short positions, putting extra buying power into the market.

This short-covering process could continue "for quite some time", Ms Allen said.

As of last week, speculators held a net short of 6,112 contracts in New York cotton futures and options, a reduction of 7,258 lots week on week, but still a historically bearish position.

A year ago, for instance, they held a net long position – meaning that long holdings, which profit when values rise, exceed short bets, which benefit when prices fall - of more than 50,000 lots.