Cotton futures crumbled from speculative liquidation to finish sharply lower Thursday and the market may see further losses because a rally that lifted fibre contracts to a nine-month high is overdone, analysts said. "Today is the first bloodletting of the bulls," Sharon Johnson, cotton expert for Frank Schneider and Co Inc in Atlanta, Georgia, said. The New York Board of Trade's key May contract sank 2.45 cents to close at 51.33 cents a lb, moving from 50.85 to 53.25 cents. July lost 2.72 cents to 52.50 cents and the rest shed 1.45 to 2.10 cents.
Fundamentally, cotton's rally is well supported by widespread expectations that consumption will run ahead of production in the 2005/06 season. Plantings are also expected to fall while demand is seen staying robust given an expanding global economy.
Futures reeled from speculative fund selling from the opening bell as overly long positions were liquidated, brokers said. Part of the catalyst was provided by a government sales report, which showed that high prices were hurting US cotton sales, they said.
The US Department of Agriculture said in its weekly export sales report that US cotton sales hit 162,700 running bales (RBs, 500-lbs each), near the bottom of trade belief it would range from 150,000 to 200,000 RBs.
US cotton shipments of previously booked orders stood at 297,400 RBs, below trade belief of 300,000 to 400,000 RBs.
"Reality just hit us right in the face," said Johnson, adding the market is "beginning to see the effects of the ongoing very high prices and the lack of competitive levels for US cotton. Even shipments were less than I had expected."
Dealers said trade buying finally emerged at the lows to provide a floor for futures and short-covering by some speculators enabled the market to pare its losses.
Brokers Flanagan Trading Corp pegged support in the May contract at 50.80 cents, with resistance at 51.70 and 52.50 cents.
Floor dealers pegged estimated volume at 28,000 lots, more than double Wednesday's count of 12,590 lots. Open interest rose 1,733 contracts to 126,127 lots as of March 16.