Cotton futures finished Tuesday at a 15-year peak for the second day in a row on a steady influx of investment fund and mill buying which kept the market poised to challenge all-time highs. For the sixth time in seven sessions, the market traded over $1 a lb as index funds who believe fibre contracts will test the all-time record of $1.172 bought cotton while mills booked supplies regardless of the cost because they fear the market is headed much higher.
A further spark was provided by news that No 2 world cotton producer India will delay exports by a month until November 1 and analysts say this could exacerbate the already tight situation in cotton at a time of brisk demand. "Global cotton demand has not seen any (demand) destruction from high prices," Sterling Smith, an analyst for brokers Country Hedging Inc in Minnesota, said. "I think funds are willing to press it higher until we see demand destruction."
Keith Brown, president of commodity firm Keith Brown and Co in Moultrie, Georgia, said index commodity funds are convinced cotton will march higher. "We're trading money, not cotton," he said. ICE Futures US key December cotton contract increased 1.31 cents to close at $1.0524 per lb. The all-time high of $1.172 is just under 12 cents away.
Total cotton volume stood at 22,397 lots at 2:55 pm (1855 GMT), over a third above the 30-day average of 16,035 lots, according to preliminary Thomson Reuters data. Open interest in the cotton market hovered at levels near a two-year high as it stood at 237,646 lots as of Monday, up from the previous session's 236,866 lots.
But the pace of the increase in open interest has slowed as most investors appeared to have sat back to wait for clear signs on the market's direction. Some are worried the steep rally may be close to topping out. "Despite our bullish stance on cotton, we hesitate to call the market much higher from current levels," said the commodity outlook report by Standard Chartered, adding cotton contracts are "approaching overbought levels."
"We look for the market to enter a period of significant price volatility, with prices likely to trade within a wide margin of US 90 cents to $1.20/lb until year-end," it said. Lou Barbera, an analyst at brokerage VIP Commodities, said though that with prices trending higher, there is no reason for index, hedge or long-only funds to dump cotton at this time. "If you're long, what's your reason for selling the market?" he said.