Cotton futures fell for the first time in five days as the spate of short-covering that had propelled the nearby contract to 10-day highs petered out. Once the shorts had run for cover, selling as commodity indices rolled over to the July contract weighed on prices, market sources said. Weak grain and commodity markets due to concerns about Chinese growth also exerted pressure.
The benchmark May cotton contract on the ICE Futures US exchange settled down 0.98 percent at 92.08 cents per lb, dealing from 91.01 to 93.75 cents, which was the highest intraday level since April 3, according to Thomson Reuters data. Market participants were surprised that prices continued to rise even as the indices moved out of the May contract. That resilience demonstrated the size of the shorts having to pay ever-higher prices to cover their position.
"May strengthened against the rest of the board while the rolls were going on. There was massive selling (by the indices), so it must have been a pretty large player trapped," said Mike Stevens, an independent analyst in Louisiana. The market has traded in a wide band from 87 to 94 cents, basis the spot contract, since the start of March, Thomson Reuters data showed.
The rise in the May contract due to nearby tightness forced the backwardation even higher, with the December contract settling at 88.68 cents per lb on Friday, up from 88.3 cents. That meant the backwardation more than doubled in size to 3.4 cents on Friday from 1.5 cents a day earlier.
Without the index rollover, the rally in prices this week, partly triggered by a larger-than-expected increase in the Chinese strategic reserve stockpile in US government data on Tuesday, could have been even more dramatic. "There was something creating a sense of urgency with those short the May contract. The index funds provided liquidity (for the short) to get out," Stevens said. He predicted the volatility will calm down next week.
Cotton's pullback was in line with the broader market, with grains under pressure following disappointing Chinese growth data. US equities, other commodities including copper and gold, and the euro also fell on Friday due to the Chinese data and renewed concerns about the euro-zone debt crisis.