AG: Cotton price wobble does not mean rally is over
The cotton market's collapse by its maximum daily limit in the last trading session does not mean that its rally is over, with a revival in prices needed to secure extra sowings and improve "incredibly tight" supplies, Rabobank has said.
The bank warned investors to expect more of the swings which saw New York prices jump by their daily limit on Thursday, and to a record 119 cents a pound early on Friday, only to end with the biggest daily loss permitted by exchange rules.
Renewed fretting over global economic growth - which cotton, as a non-food product, is more exposed to than many other farm commodities – and unstable foreign exchange rates mean "volatility is likely to be heightened".
However, with demand from China, the biggest importer, strong and stocks in top exporter US at their lowest for 20 years and falling, there was little scope for prices to fall.
Sowing incentive 'not there'
"In contrast to the price rally of March 2008, Rabobank believes this rally is more sustainable," the bank said in a report.
New York cotton futures will remain "at elevated levels".
Indeed, without high prices, US and Brazilian farmers look unlikely to sow the extra cotton acres needed to ease the commodity's "extreme tight supply and demand situation", with the rise in soybean prices meaning the oilseed offers farmers higher margins, particularly where it can be doubled cropped with wheat.
"At current price levels, the incentive is not there."
Meanwhile, demand is set to be boosted by increasing shipments to flood-hit Pakistan, whose import needs may have been underestimated by some observers, given the weak crop estimates coming from the Pakistan Cotton Ginners Association.
Price threats
The greatest threat to the outlook for higher prices were the "remote" risks of a double dip recession, a rebound in the dollar or of a splurge of exports from India which, despite a promising crop, has kept a tight rein on shipments in an effort to quell domestic prices.
Rabobank also noted signs that the rise in Chinese yarn prices has since late August begun to lag that in cotton, suggesting a tightening in mill margins which could erode demand.
"Anecdotal reports have indicated that the substitution of cotton yarn for synthetic fibres is starting to occur," Rabobank added.
Cotton for December delivery stood 0.5% higher at 110.36 cents a pound at 08:00 GMT.
