US cotton ended down about 3 percent on Thursday, after rising by almost the daily limit on speculative buying before falling as much on selling related to a rebalancing of cotton holdings by commodity indexes. "It was an interesting day in cotton where we travelled over nine handles," Mike Stevens, an independent cotton analyst in Mandeville, Louisiana, said, using market jargon to describe the volatile session.
Benchmark March cotton contracts on ICE Futures US closed down 3.98 cents, or 2.7 percent, at $1.4122 per lb. The contract neared its four-cent trading limit to set a one-week peak at $1.4909. In later trading, it fell almost four cents to hit a session low of $1.4120. Stevens attributed the choppy session partly to a mixed reading of latest weekly export data for cotton, which showed a net drop in sales.
"At first blush, people took the report as bearish. Then some got thinking that this were sales from the old crop and the market's already in sharp deficit for new supply. That popped the market back up." But as the session progressed, selling pressure re-emerged as index funds started to rebalance their cotton holdings to align with new weightings for 2011. Index funds will be paring risk from cotton and other overly-weighted agriculture markets and adding exposure to natural gas and crude oil under the rebalancing which runs between this week and next.
Investment bank J.P. Morgan Chase has estimated that nearly 14,000 cotton contracts could be offloaded under the exercise, putting immediate pressure on cotton despite its strong fundamentals over the longer term. Another but smaller bearish factor for prices on Thursday was the announcement by CME Group that it will raise from Friday margins for cotton trading on the Chicago Board of Trade - a cotton market far less liquid than the one on ICE.
Some traders think the liquidation pressure over the next fortnight could take ICE's benchmark March cotton to below the key $1.30 mark. But some market bulls are eyeing record highs above $1.60 per lb, saying this could even happen in the near term if supply fears worsen from floods in Australia and dry conditions in the US cotton belt of Texas.
March cotton peaked at $1.5912 on December 21, capping a streak of highs last seen during the 1861-1865 US Civil War - a time when the President was Abraham Lincoln. Many in the US cotton industry who have grouped for an annual conference in Atlanta this week appeared cautiously optimistic that high prices will persist in 2011.
But they also said a lot will depend on what China, the world's biggest producer and consumer of the fibber, will do, especially after it drew down state cotton reserves. China could raise cotton sowings and output in 2011, but its activity in the area may be limited if it opts to concentrate on increasing food output and the economic policies it adopts, some participants to the Atlanta conference said.
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