Societe Generale cautioned investors against adding to short positions in cotton futures, citing the potential yet for the US crop to fall short of expectations, stating the risks of drought and cooler-than-normal temperatures.
The bank said that, in a forthcoming quarterly commodities review, it is poised to make a "rather dramatic cut" to its forecasts for New York futures in the fibre.
However, with SocGen's current forecasts at 85.68 cents a pound for the October-to-December period, and 87.39 cents a pound for the first quarter of 2015 that leaves considerable scope for downgrade before hitting the futures curve.
Indeed, a crop tour to Texas, the top US cotton-producing state, had left the bank recommending investors "to be reticent to add to existing shorts".
'High variability'
The comments - which follow the release of data showing hedge funds have turned net short in New York cotton futures and options for the first time since November 2012 – reflected concerns over parts of Texas including the state's Southern High Plains region, responsible alone for some 12% of domestic output.
The tour revealed a "high variability" in crop potential, "both in terms of stage of development and crop conditions - some fields looked good, others looked rather bleak," SocGen analyst Christopher Narayanan said.
Plant development was some two weeks behind the typical pace, thanks to cooler-than-normal conditions for a crop which is typically viewed as benefitting from hotter temperatures than the likes of soybeans, with minimum temperatures above 70 degrees Fahrenheit (21 degrees Celsius) and maximums above 90 degrees Fahrenheit (32 degrees Celsius) seen as ideal.
"Risks to watch for include 3-4 day stretches of cooler than normal temperatures under cloudy skies, particularly in September and October.
"Conditions such as these could reduce yield potential."
'Reticent to add to shorts'
Crops in some areas were also grappling with a dearth of moisture, requiring rainfall in the next two weeks, "and certainly by the end of the month" to maintain development.
Official data show that 57% of Texas remains in drought – above the 44% at the start of 2014 – if below the 88% a year ago.
With some parts in drought for three years, the dearth of rainfall has reduced to 37% the proportion of cotton in the Texas South High Plains being irrigated, SocGen said.
The bank said that a recovery in demand, and or a "severe supply shock" would needed to spark a sustained rally in cotton prices.
However, "we would be reticent to add to existing shorts given the risks in the Southern High Plains," Mr Narayan said.
If crop risks "came to fruition, we would expect a (perhaps short-lived) 'pop' to the upside" in prices".
'A little less bearish'
The comments come at a time of some stabilisation in cotton futures which, for December delivery, have risen by 2.4% so far on Ice this month, after a 14.3% fall in July, when the lot set a succession of contract lows.
Other commentators, including the International Cotton Advisory Committee and John Robinson, cotton marketing specialist at Texas A&M University, have also turned less downbeat on prices, after their decline.
Dr Robinson said that "after maintaining a months'-long inversion of old crop over new crop futures, the December 2014 contract continues to trade below the March, May, July and December 2015 contracts… a move back towards normal economic relationships.
"That move suggests things might be a little less bearish for the future, although this interpretation may be a little hasty."
The December 2014 contract closed on Monday up 0.3% at 64.40 cents a pound.
