Cotton prices surged on Friday, reaching the highest level in nearly a year, on fund buying and short-covering amid expectations that No 1 textile market China will continue buying even as prices rally. The most-active May cotton contract on ICE Futures US closed up 1.64 cents, or 1.8 percent, at 92.50 cents per pound. Earlier, it climbed as high as 93.93 cents, the highest price for the spot contract since late March 2012.
China, the world's largest fibre consumer, is expected to issue extra import quotas to struggling textile mills, lifting hopes of continued robust demand, even in the face of a more than 20-percent spike in prices since the start of the year. "(The increase) has a lot to do with China buying. You've got speculators buying and short-covering at the same time," said Joseph Ricupero, vice president at RJ O'Brien in New York.
Cotton closed up more than 6 percent from last week's close, posting its largest weekly gain since October 2012. Strong physical demand combined with a tightening supplies have underpinned the recent market rally, merchants and growers have said. That has been bolstered by continuing investment by non-commercial dealers and short-covering from commercial dealers needing to cover their positions.
"For every long (position), there's a short (one). The market begins to get overpriced, and you force the shorts out of the market," said Sterling Smith, futures specialist with Citigroup in Chicago. Speculators increased their bullish position in cotton futures and options to a five-year high in the week to March 12, Commodities Futures Trading Commission data showed on Friday.
Meanwhile, commercial dealers hold a large net short position that either needs to be delivered against the exchange or needs to be unwound, which has set cotton prices up for short-covering rallies. The July/December spread stood at 4.25 cents a lb on Friday, with the July contract's premium spiking from 0.81 cents four sessions ago.
The July contract represents pricing for the 2012/13 cotton crop, and the December contract represents the new crop. The July contract on ICE settled up 1.3 percent at 92.76 cents a lb, where the December contracted slid 0.03 percent to 88.51 cents a lb. Trading volumes were heavy, at more than 36,000 lots, about 49 percent higher than the 30-day average, preliminary Thomson Reuters data showed.
Open interest has been on the rise, climbing to 211,713 contracts on Thursday, according to ICE data. That is near a high of 214,167 contracts reached last month, the most since February 2011, not long before cotton prices peaked at more than $2.2 per lb, their highest since the US Civil War.
Prior to the recent rally, cotton posted two years of losses, as lower-priced, manmade alternatives eroded demand for the natural fibre and global surpluses grew. While supplies have been seen to be tightening, the world is expected to see a record global surplus by the end of the 2012/13 crop year through July. Much of that surplus is forecasted to become part of China's stockpiles, and seen as unavailable to the global marketplace. In 2011, Beijing began building its reserves, buying above global prices to support growers. The world's largest cotton consumer is forecasted to have enough fibre in its stocks by the end of July to feed its demand for more than a year.