Cotton futures retreated on Monday, on track for a 16 percent drop in the third quarter, under pressure from a strong US dollar and fears that reduced demand in top consumer China will cause global inventories to swell. The benchmark December cotton contract on ICE Futures US closed down 0.42 cent, or 0.7 percent, at 61.47 cents a lb.
Prices dropped to a five-year low of 60.83 cents a lb last week following a long expected barrage of new details from Chinese government official of a policy overhaul that will sharply reduce import demand in China, the world's largest textile market. Beijing said it will cut import quotas in 2015 to the minimum required by World Trade Organisation commitments.
Traders have been awaiting details of how China will roll out the specifics of its new farm subsidies as it scraps a stockpiling program it launched in 2011 that drove voracious demand for foreign fibre. China's imports will drop to a 10-year low and its stocks will fall, while inventories elsewhere are poised to rise by 2.1 million tonnes, said industry analysts at Cotton Outlook in a report on Friday.
"The fact is that China is going to consume less cotton. No one really believes that demand is going to pick up," said a US broker. Cotton felt further pressure as the US dollar index touched a four-year high against a basket of major currencies, before reversing because of worries over Hong Kong unrest.
A stronger greenback makes dollar-traded commodities more expensive to holders of other currencies. Despite the pressure across the forward curve, nearby prices continued to trade at a premium to futures contracts further out. Market backwardation is often seen as evidence of tight inventories. US stocks started the 2014/15 crop year at a 23-year low of 2.45 million bales.