The expiry of March cotton futures looks a key test for the cotton rally, which foundered on Tuesday, after in the last session driving prices above 90 cents a pound for the first time in six months.

New York's best-traded May cotton futures contract on Tuesday fell 2.2% to 87.33 cents a pound.

The decline took it well below the 90.44 cents a pound reached in the last session which represented the highest for a nearest-but-one contract since August.

However, this may prove only a temporary setback, cotton broker Keith Brown said, flagging the role in deciding market direction of the March contract, now in the delivery process, ahead of expiry on March 7.

'Get it neutralised'

"So far we have had no deliveries against the March contract," a factor which, in signalling a dearth of cotton to deliver, or a lack of willingness to sell at futures market prices, was supportive for the market, Mr Brown said.

However, there was still time for this to change, fostering some deterioration in sentiment.

"We need to get March out of the way, get it neutralised," Mr Brown, at US-based Keith Brown & Co, told Agrimoney.com, attributing the price setback on Tuesday potentially to disappointment over China.

"The three c's, cotton, crude oil and copper, are all down," potentially a reaction to disappointing data on Chinese property price growth which has been blamed for fuelling a decline in the remninbi to a six-month low against the dollar.

China is the top grower, consumer and importer of cotton, besides being a big buyer of oil and copper.

He added that he remained "friendly to the market", saying that "any bull market is a process, and progresses at varying speeds".

'Even sharper fall'

However, broker Doane flagged the disappointing performance of late by US exports, noting that shipments have "now fallen behind the pace needed to sustain the US Department of Agriculture's current export forecast".

The USDA has forecast US cotton exports of 10.5m bushels for the year to the end of July, with less than 5.1m bales actually shipped so far, although there remain a further 4m bales in outstanding sales.

Commerzbank also noted "meagre" exports in the latest week, but flagged also the prospect of lower prices ahead given expectations of a bigger US crop this year, and a change to the Chinese subsidy policy which has been a big prop to prices.

"The December contract, which represents the next crop, is trading lower [than May] because significantly higher US production should replenish stocks," the bank said.

"As demand from China declines at the same time, we envisage an even sharper fall in price."

'Downside risk'

Separately, Vyanne Lai, agribusiness economist at National Australia Bank, also highlighted the "downside risk to prices" presented by China's switch from a price support regime to a direct payment-based cotton subsidy policy.

"The question is not whether or not prices will fall, given that it is a foregone conclusion, but more critically, by how much and in what fashion," Ms Lai said.

"There are concerns in the market that there could be a disorderly unravelling of prices when the Chinese government decides to dispose of its cotton inventory," which has risen to comprise more than half of world stocks thanks to the generosity of its price support programme.

"That said, the possibility of a hard-landing in prices appears remote at present, as the Chinese government is more likely to undertake a measured and gradual liquidation process to achieve basic returns for its stocks and avoid roiling the market," she said.

'No dumping likely'

Indeed, the bank said it did not foresee China "dumping" stocks from its cotton strategic reserves "in any hurried sense", given that authorities are trialling a programme of direct subsidy to farmers.

"The government should understand that any sudden, massive release of stocks will cause a sudden dip in prices that will offset the production incentives offered by the subsidy" Ms Lai said.

"We believe that it will instead release stocks in a systematic manner to manage downward price pressures for as long as the direct subsidy trial is in place."

This would "assure downstream players that it is committed to progressively subject the raw cotton market to market mechanisms and bring domestic prices lower, while maintaining incentives farmers to continue production".

NAB forecast the Cotlook A index of physical prices averaging 88 cents a pound in 2014, compared with 90 cents a pound last year.

The USDA last week forecast the Cotlook A, which in including a transport element typically stands at a premium to futures, averaging 70-90 cents a pound for 2014-15, compared with about 90 cents a pound expected for 2013-14.