Cotton futures surged by their daily limit to settle at a new 15-year peak on Monday due to mill and speculative fund buying, with market sources expecting a test of record highs set in 1995 in coming weeks. The initial boost came from mill buying by top consumer China, which returned to the market after the country's five-day mid-autumn holidays, brokers said.
Investment, hedge and long-only funds then stepped in, with many believing cotton futures could break the all-time high set in 1995 at $1.172 per lb. Mike Stevens, an analyst for brokers SFS Futures in Mandeville, Louisiana, said "we got another round of panic buying" once the December contract raced past the previous week's high of $1.0334.
"You have a bullish fundamental situation and a bullish technical situation," he said. ICE Futures US key December cotton contract rose by its 4.00 cent limit to close at $1.0393 per lb, with the day's low at $1.0075. That marked the loftiest finish for the second position cotton contract since 1995, and the second time since the current rally began in mid-July that cotton closed over $1/lb.
Volume stood at 24,828 lots at 2:42 pm EDT (1842 GMT), nearly two-thirds higher than the 30-day average of 15,027 lots, preliminary Thomson Reuters data showed. There remains no sign that market positions are being liquidated in a sustained manner. Data from ICE Futures US showed open interest in cotton futures at 236,866 lots as of Friday, up slightly from the previous tally of 235,919 lots.
China sparked the rally, analysts said. "The Chinese got busy," Bill Raffety, an analyst for commodity futures brokerage Penson GHCO, said. "It appears the trend (higher) will continue near-term." Cotton futures traded over the psychological $1/lb mark for the fifth time in six sessions.
Behind the strength in cotton is healthy demand from Asia in particular, tight stocks and heavy buying by investment, hedge and long-only funds that saw the market as undervalued. Lou Barbera, a dealer for VIP Commodities, said speculative accounts bought on dips along with some mill fixation purchases by China.
With mill and consumer demand brisk, "there's no reason why it can't continue higher", he said. The window for Chinese activity may be limited as the Asian country will again be on holiday from October 1 to 7. The market also gained support from news that India may delay exports by two weeks to mid-October because of dwindling stockpiles and poor arrivals of new-crop cotton.
Stevens said the only potential negative for market fundamentals could be sizeable Indian cotton exports. The latest CFTC commitments summary issued last Friday showed non commercial net longs and managed money net longs down almost 20,000 contracts, reflecting a profit-taking correction seen last week. Most analysts feel the outlook for cotton remains bullish, though some say it is overbought and could be vulnerable if global economies plunge into a double-dip recession.
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