US cotton futures finished the daily limit up Friday on fund and investment buying after storms ripped through the key growing state of Texas late last night, analysts said. Hail and heavy rain hit Texas, which harvests about half of the US cotton crop, igniting a renewed round of speculative fund and investment buying on uncertainty over how much damage the storms may have caused to the crop.
The Weather Channel said on Friday hail hit the state and up to two inches of rain fell in Lubbock, Texas, in the heart of the US cotton belt. ICE Futures US key December cotton contract increased the 4.00 cent limit to close at $1.1971 per lb. The session low was at $1.1525. It was the third consecutive day of gains for cotton, having topped out last week at the record top of $1.198.
Volume traded in the cotton market stood at 21,430 lots, about 6.0 percent below the 30-day average at 22,794 lots, preliminary Thomson Reuters data showed. "It's an emotional reaction to the storms in Texas," Mike Stevens, an independent cotton analyst in Louisiana, said of the market's limit up move. Sharon Johnson, cotton expert at First Capitol Group in Georgia, said there was "uncertainty regarding damage to West Texas fields after a severe storm moved through overnight" and along with Chinese mill buying, stoked Friday's cotton rally.
The market's technical outlook though indicates it has moved into overbought ground. Stevens said fears of damage to the cotton crop in Texas ranged from around 50,000 to 400,000 (480-lb) bales. Johnson said in a report commercial sources pegged damage would be limited to "those fields where cotton is strung out of the boll due to wind/hail." "Estimated losses are fairly small, 25,000-50,000 bales (if that) from a crop that was estimated at 8.9 mln bales for the state (per the US Agriculture Department) as of October 1," Johnson said in a report. The US 2010/11 cotton crop was seen by the USDA reaching 18.87 million bales.
Cotton prices on the ICE Futures US exchange soared last week to a level that the Mississippi Historical Society said was last seen during the US Civil War from 1861 to 1865. The market has rallied since July due to tight stocks and strong cotton demand, especially from world No 1 producer and consumer China. Investment funds have flooded into cotton because they feel it was undervalued and is the next big thing in commodities.
In China, the Zhengzhou Commodity Exchange's May cotton futures was last traded at 25,145 yuan per tonne, up 260 yuan from its previous close. Fundamentally, any losses to the US crop could lead to a further squeeze in available supplies and trades said this may drive prices higher as a result. "This is not what cotton wanted to see at this time," said Sterling Smith, an analyst for brokers Country Hedging Inc in Minnesota.
On Thursday, a Thomson Reuters survey of Chinese analysts expect the country's cotton production in 2010/11 to reach 6.45 million tonnes, sharply below the USDA estimate of 6.976 million tonnes. Analysts' views were further bolstered by influential industry publication Cotlook, which cut China's 2010/11 cotton production forecast to 6.4 million tonnes on Thursday. On the other hand, analysts said the market should begin to see some pressure next week when investment funds begin to roll their positions forward out of the spot December contract as it gets ready for first notice day in deliveries next month.
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