US cotton futures closed lower on Friday on profit taking after rallying on Thursday to five-month highs when trade and speculative shorts covered positions amid fears about a US supply shortage. The most-actively traded December cotton contract on ICE Futures US fell 0.84 cent to settle at 76.88 cents after hitting its highest level since May on Thursday and rising over 12 percent since October 11.
Prices gained over 7 percent on the week, the market's biggest rise since mid-June. This week's supply concerns were triggered by signs from early harvesting in the south-eastern United States that some crops had high levels of "micronaire", or coarse fibers that could break during the spinning process at textile mills.
The gains came even as the market expects a record global surplus in the marketing year to end of July. Only US cotton is deliverable at the exchange. Reflecting the covering, the latest data released on Friday showed hedge funds and other speculative investors switched to a net long position in the week to October 16. They had been short for the two prior weeks.
The perception of a nearby supply squeeze also kept the market in backwardation for a fourth session, with December 1.86 cents above March on Friday. Trading activity and liquidity shot up, with combined volumes over three days to Thursday almost hitting 190,000 lots. That is about four times higher than average levels and more typical of sugar, ICE's largest softs contract.
"The past week also caught the eye of traders that had moved away from cotton looking for the next big play. They may not have come back to cotton yet, but they will if the volatility is maintained," said Sharon Johnson, cotton specialist at Knight Futures in Atlanta, Georgia. Open interest, the number of outstanding contracts and a measure of a market's liquidity, hit June highs above 200,000 lots. In June, prices and trading volume took off due to short covering ahead of the expiry of the July contract.