Cotton’s bullish run

But big stocks of cotton sitting in China could stem the potential for further upside.

Rabobank analyst Tracy Allen said cotton futures had rallied 10 per cent in January and nearby cotton futures for March delivery in 2013 were early this week sitting above US80 cents a pound – about US83.79c/lb, well above $400/bale.

More relevant for local growers is the July contract which is up 4pc in the past month, sitting just above US81c/lb.

Ms Allen said the main driving factor in the rally of the cotton market had been the growing interest in managed money, with Rabobank seeing a rapid increase in the volume of traded cotton.

This is mainly stemming from managed money funds lifting their net long positions in cotton and also reducing their net shorts.

In addition, a likely reduction in the availability of exportable supplies next year had also been a key bullish factor.

“From the point of view of global supply and demand, in this 2013-14 season we are expecting that global cotton production will decline by 11pc internationally,” Ms Allen said.

“That’s likely to reduce the availability of exportable supplies this year and that’s been the main

bullish signal for the market, to look to take cover, particularly at the end this year.”

“Additionally, a main factor that has been supporting the market for quite a long time is the policies of the Chinese Government through both their quota systems and their reserve stock piling, and through their minimum pricing arrangements for local growers.”

While some growers were starting to take advantage of the lift in cotton prices, according to Namoi Cotton’s Pedr Harvey, little of the Aussie crop has been forward sold.

“Last week prices pushed up to $420 which is the highest we’ve seen since planting but up until now growers haven’t been willing sellers; they’re not interested in selling sub $400,” Mr Harvey said.

“Very little has been forward sold – up until a week and a half ago only 15pc to 20pc of the Australian crop had been sold – however, how much has been done between merchants since then is unknown.”

The forecasts are for cotton prices to continue to rise, albeit marginally, with analysts forecasting US85c/lb – about $A420 a bale with an Australian dollar of $1.05 – for the fourth quarter of 2013.

However, Queensland Cotton’s executive general manager for cotton marketing Phill Ryan warned, given almost half of the world’s cotton stocks were tied up in Chinese government reserves those in the industry should remain cautious.

“The reason cotton prices have hit $400 to $410 has been a run up in the underlying futures market with the current state of the Australian dollar also improving prices,” he said.

“However, I can’t see the market getting too carried away. With 80 million bales of cotton stock worldwide – twice what we really need – and almost half of that tied up in Chinese Government reserves, the price direction of the cotton market remains uncertain.”