Most ICE cotton contracts ended Tuesday with modest losses, as participants prepared for the Department of Agriculture's first US supply estimates of the coming crop year, which many analysts expect will be hefty though lower than current yields. But extreme weather conditions, either too much or too little rainfall depending on the region, has resulted in a wide range of estimates. So some players decided to pull back their positions ahead of the report, after a recent run up in prices.
"(The selling was) a little bit of position squaring. With the USDA report coming on Friday, I think the buyers are going to be a bit timid at these levels and the market may be able to pull back marginally," said Sterling Smith, futures specialist at Citigroup in Chicago. Most-active July cotton on ICE Futures US settled 0.24 cent lower at 87.15 cents per lb. Volume was 13,808 lots.
Cotton prices had gained for each of the three previous sessions, as investors bet unfavourable weather, with either too much or too little rain, in top growing states in the United States would compromise the current crop. "Without question, this is one of the crop years when weather trumps all concerns with pending production," said Sharon Johnson, cotton specialist for Knight Futures in Georgia. The US Department of Agriculture's (USDA) monthly crop report on Friday will be watched for any changes in the supply and demand forecasts that reflect erratic weather conditions.
Dealers also said Tuesday's selling was due in part to the expiration of May cotton futures on Wednesday. Some players saw the higher prices in July futures as carrying too large of a premium over the May contracts, selling July and buying May futures to bring their prices more in line with each other. "May expires tomorrow and July was carrying a pretty big premium. So it backed off a bit from that," said Keith Brown of cotton broker Keith Brown and Associates in Georgia.
He added that it still carried a healthy premium of about 115 points over May futures. "But that's nothing that the market can't handle. You could continue to see July back off until it equals the 86 (cent per lb) area where May finished," Brown said. July had sold off considerably earlier in the session, which Brown said reflected cotton's poor planting conditions.
He and others said the crop would eventually get in the ground, but could continue to see weather related delays. Analysts have offered a wide range or estimates for the 2013/2014 crop with projections running as low as 14 million up to around 18.45 million bales compared with current USDA estimates of 20.65 million bales for the 2012/2013 crop year.
The 2011/2012 crop came in at 18.19 million bales. "I think we've had enough improvement in the weather that we could be looking at some better yields. With the run up we've had in cotton prices of late, coupled with some weakness in corn and soybeans, I think we might be able to sneak a few extra cotton acres in," said Smith, who projects a 17.67 million bale crop for the coming season.
Friday's USDA report will also be the first estimates for the corn, wheat and soybean crops, which have also been impeded by drastic weather conditions that could cause some farmers to switch acres to cotton from other crops. Cotton traders' concerns run from drought conditions in Texas, the country's top growing region, to too much rain delaying cotton planting in the Southeast.