Cotton futures catapulted to their biggest one-day gain in five months on Wednesday, as chart signals triggered waves of short covering. The benchmark December cotton contract on ICE Futures US jumped to 66.20 cents, the highest level since late July, before closing up 1.65 cents, or 2.6 percent, at 65.81 cents a lb.
Volumes picked up as the December contract breached short-term moving averages and technical resistance at the 65-cent level, triggering buy-stop orders. "The downside was exhausted," said Peter Egli, director of risk management at British merchant Plexus Cotton Ltd, noting that the crossing of the 7-day and 20-day moving averages prompted short covering. Rising expectations of a bumper crop in the United States, the world's top exporter, have caused second-month prices to slump some 30 percent from March highs near 97 cents a lb.
Speculators have built a huge bearish position in cotton as expectations have mounted that US supplies will balloon at the same time that demand in top consumer China will sharply drop due to a government policy overhaul in the 2014/15 crop year that began on August 1. The second-month hit a near five-year low of 62.02 cents a lb on August 1. Producers have ceased selling into the slide. This has left the market vulnerable to a short-term rally to 68-69 cents, where farmers are expected to renew their selling.
Concerns over dry weather this month in key growing regions of Texas, the top-producing state, have mounted. A weekly crop progress report showed crop conditions have deteriorated in the United States, the world's top exporter. Exchange inventories continued to slip to the lowest levels since late January. ICE stocks fell to 86,690 bales on Tuesday from 88,149 bales previously, the most recent exchange data showed.