By Julie Wernau
Cotton prices continued their climb Thursday as producers rushed to take advantage of December contract prices that are higher than the March contract.
The reason: A U.S. Department of Agriculture update this week for world agricultural supply and demand increased expectations for world demand for cotton this year and next by approximately 3 million bales.
Cotton for December delivery, the most active contract, rose 1% to end at 73.87 cents a pound on the ICE Futures U.S. exchange versus 73.54 cents a pound for the March contract. The phenomenon--referred to as "backwardation"-- is seen as an indication of near-term demand for the fiber, as typically later months are more expensive as merchants account for the added costs of carrying cotton.
The 2015/16 estimate of aggregate world consumption increased around 2 million bales in July versus the government's June estimate and aggregate world consumption was estimated at about 1 million bales higher in July versus June for the coming 2016/2017 crop.
The government's update showed that a greater percentage of cotton will come from the U.S. than previously anticipated. A boost to cotton production in the U.S. is expected to be snatched up by China where recent strong demand for the government's sales of cotton reserves are indicating that mills there are consuming more cotton than the USDA previously anticipated. That lowered the government's projections of leftover stocks of the fiber this year and next.
The news moved bullish speculators into the market and encouraged mills to lock in prices for December, directly after the U.S. harvest.
"These guys are going to be pushing cotton out the door earlier," said Louis Rose, founder of commodities consulting firm Risk Analytics. "We're upside down. There's no reason to be carrying it."
The contract's front month, October, is up 15.9% over the past five trading days, the largest five-day percentage gain since June 19, 2012, according to FactSet.
Still, Thursday's export and sales report from the USDA didn't show enough cotton being shipped overseas from the U.S. to meet the USDA's revised export target, Mr. Rose said, and he doesn't see mills chasing cotton from the old crop at the moment.
In other markets, raw sugar for October rose 2.2% to end at 19.91 cents a pound, cocoa for September was up 0.5% to settle at $3,157 a ton, frozen concentrated orange juice futures rose 1% to close at $1.842 a pound and arabica coffee for September gained 3.1% to end at $1.5215 a pound.
