NEW YORK: Cotton futures sank 2.5 percent on Wednesday as late-day profit taking offset speculative buying and knocked prices off two-year highs, with volatile trading further roiled by a massive blow-out in the far forward backwardation.
Renewed speculative buying as investors bet on tightening U.S. supplies sent front-month prices soaring to over 97 cents per lb for the first time since January 2012 in heavy early volume.
A wave of selling in early afternoon more than offset those gains as investors locked in profits and some mills priced in deals, adding to the wildly volatile trading so far this week.
Nearby buying pushed July prices, representing the end of the 2013/14 season, to a 16-cent premium over December, the benchmark for the next season's U.S. crop, reinforcing expectations that traders will sell any stock against July to avoid carrying over fiber into the new season.
The inversion is the biggest between the second and fourth month since June 2011, rekindling memories of the tumult that year when prices soared to records above $2 per lb as a drought devastated crops in Texas. As mill demand evaporated due to the high prices, prices more than halved.
Both the speed of the price moves and the size of the swings have been remarkable this week, but an increase of 16.7 percent in the initial margins to $1,750 per contract may crimp some of the speculative activity on Thursday.
The wild gyrations in prices this week reveal the conflicting factors at play. China's efforts to offload its strategic stockpile could release huge inventory onto the market, while U.S. supplies by the end of this season will be the lowest in decades.
"The specs like the cotton story and think they've underestimated the shortage of cotton. The traders, on the other hand, are short and hoping the market will to come its senses," said a buyer at a mill.
The benchmark May cotton contract on ICE Futures U.S. closed down 2.45 cents, or 2.6 percent, at 91.66 cents a lb.
Prices surged over 3 percent to as high as 97.35, a fresh two-year high, trading in a massive 6.52 cent range on the day, its widest in almost two years.
These high prices will "draw cotton out of the woodwork", said a source at a grower.
On Tuesday, prices had their best day since July as speculators piled back into the market after Tuesday's ginning report confirmed that the surplus this season will be its lowest level since 1990.
That was in line with expectations, but it sent a "strong bullish signal to the market," said Sharon Johnson, a cotton specialist with KCG Futures in Atlanta.
On Monday, prices sank their most in months after Beijing cut its sales price for its reserve fiber.
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