By Alexandra Wexler
March 13, 2014 7:08 p.m. ET
NEW YORK—Cotton futures hit a nearly one-year high Thursday, juiced by a government report showing continued exports for the fiber even as costs rise. But some investors say the latest gains pushed prices into a range that could cool demand.
Cotton for May delivery traded up to 93.75 cents a pound, a price unseen since March 15, 2013. Futures later fell back, ending the day down 0.6% at 91.68 cents.
Prices have risen steadily in 2014, after this season's cotton harvest shaped up to be the smallest since the 2009-10 crop year. The U.S. Department of Agriculture also raised its forecast for cotton exports Monday, increasing concerns about tight supplies in the U.S. Cotton prices are up 8.3% this year. The crop year ends July 31, but most cotton is harvested by the end of December.
While overseas demand for cotton is strong, some analysts say that won't be the case if prices rise much further. Many traders and analysts put the breaking point at around 95 cents a pound. At that price, textile mills in Asia, the top importers of the fiber, might buy from other countries. Higher prices also are expected to encourage more U.S. farmers to plant the fiber this spring, leading to a bigger 2014-15 crop.
Shawn Hackett, president of Hackett Financial Advisors, a brokerage and consulting firm in Boynton Beach, Fla., has plans to employ bearish, or short, bets if conditions seem ripe.
"I plan on putting some 'shorts' on in this market anywhere past this 95-cent area," he said. Near-term demand for the fiber "is keeping the market well-supported above what it should be," Mr. Hackett said.
Cotton prices rose to just below 94 cents a pound twice last year. On both occasions, the market sold off sharply, including a three-day, 9.7% plunge in August. Futures prices reflect cotton grown in the U.S., the biggest exporter, and also act as a global benchmark.
Demand for U.S.-grown fiber comes mostly from countries in Asia that spin the cotton into yarn and fabric. But top cotton importer China, which quintupled the size of its cotton stockpile over the past two years to ensure a steady supply to its mills, has been buying less. Some investors are concerned Chinese cotton could become more readily available and accessible to its domestic mills, reducing the need for imports, particularly as U.S. cotton becomes more expensive.
On Monday, the USDA raised its forecast for cotton exports by 1.9% to 10.7 million bales in the crop year ending July 31. But exports in the week ending March 6 were down 36% from the average of the previous four weeks, potentially an early sign of waning demand, traders say.
Some traders see the fact exports continued even as cotton prices cracked 90 cents as a sign buyers will tolerate higher prices. Supplies also are running low. The USDA predicts end-of-year cotton stocks will total 2.8 million bales, the lowest in three years.
Until exporters start cancelling more purchases, "you're going to continue to push [prices] up," said Sharon Johnson, an Atlanta-based cotton specialist representing KCG Futures. She thinks prices could rise as high as 96 cents a pound in the next few weeks.
But even some bullish investors say cotton's rally is unlikely to outlive the current season. U.S. farmers are expected to plant more cotton this spring than they did last year, according to a survey released in February by the National Cotton Council. That could lead to the 2014-15 crop being almost a quarter larger than the current season's, the industry group said.
"It's very likely that [the market's] about as high as it's going to go," said John Flanagan, president of Flanagan Trading Corp. in Fuquay-Varina, N.C. "At these levels, [prices are] going to encourage too many acres."
The cotton contract for delivery in December, the first to correspond with the new crop year, is under more pressure than those in the coming months, which include May and July. On Thursday, cotton for December delivery was trading 11.7 cents below cotton for May delivery.
Jason Rotman, a partner at Lido Isle Advisors LLC, an investment firm in Newport Beach, Calif., said his firm is looking for an opportunity to place bearish bets due to the steep discount in the December contract.
"The euphoria could be over," Mr. Rotman said.
Write to Alexandra Wexler at alexandra.wexler@wsj.com
