COTTON prices have surged to their highest levels in two years based on a surprise cut in stocks in this week’s US Department of Agriculture (USDA) World Agricultural Supply and Demand Estimate (WASDE) report.
December futures on the world’s largest cotton trading exchange, the Intercontinental Exchange (ICE), touched US74.78 cents a pound early on Wednesday, after going ‘limit up’ for two consecutive sessions.
Trading was manic on Tuesday and Wednesday, exceeding the maximum US4c/pd daily limit in terms of price gains.
Even the slightly lower closing price of US73.25c/pd represents a near 10 per cent increase in total value over the two sessions.
The USDA cut 3.4 million bales, or 3.5pc, from its estimated stockpile of 94.7 million bales in terms of world stocks in this week’s report.
This represents the lowest stocks in five years.
"While a reduction in global ending stocks was not unexpected given the strong uptake seen at Chinese reserve auctions this year, the scale of the fall appears to have caught the market by surprise," said agri-commodity analyst Madeleine Donlan, CBA.
“The market was expecting a cut to inventories but not to this scale.”
But she said it was not simply the USDA report driving the price surge.
"Ongoing weather concerns in US cotton regions, such as the southern plains, currently experiencing a heat wave, also added to the market's momentum.”
“Already the USDA has downgraded the crop condition from 56pc good to excellent last week to 54pc this week on the back of the heat.”
Ms Donlan said there were also concerns surrounding the Indian crop, where monsoon rains have come late.
However, she cautioned if the price pushed too high, down the track there may be competition from alternative fibres, such as the artificial products, which may make up an increasing part of clothing blends should cotton get too expensive.
Ms Donlan said the rally was probably higher than the new data dictated.
“There is still plenty of supply comfort across the globe, but as the sugar market showed earlier in the year, the threat of supply concerns, even if distant, can drive the market.”
“The USDA had a stocks to use ratio of 91pc for this season, which has been cut to 82pc for next year, it is a big fall, but there is still ample supply.”
She said most major cotton producing regions had been cutting back on plantings in recent years due to the low prices.
“This is the first time we have seen a solid upgrade in terms of consumption that could have a bearing on the market.”
In Australia, Ms Donlan said there could be higher plantings next season, given the rise in prices and the fact some parts of the northern cropping belt was too wet to plant a winter crop.
She also said there had been good expansion of the cotton producing area with new varieties opening up southern irrigation districts, such as the Hay area in NSW, for cotton plantings.
