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Cotton futures plunge limit down, after US forecasts record yield

Cotton futures plunged limit down after the US hiked expectations for the domestic output of the fibre – defying some expectations of a downgrade – lifting the forecast for Chinese output too.

The US Department of Agriculture, in its much-watched monthly Wasde report on world cop supply and demand hiked by 1.5m bales to an 11-year high of 20.5m bales its forecast for the domestic cotton harvest this year.

Officials acknowledged some setbacks to crops, notably in the top growing state of Texas, where "hot temperatures, high winds, and hail storms caused stress and damage to some fields across the southern High Plains and the northern Low Plains" last month.

However, the USDA said that the upgrade was warranted by the season's first field-based assessment of US output prospects, with previous estimates based solely on factors such as weather and crop condition ratings.

The estimate for this year's cotton yield was hiked by 76 pounds per acre to 892 pounds per acre, matching the record high set in 2012.

Investors wrong-footed

The upgrade caught out investors – many of whom had forecast a cut to the US harvest estimate.

Jack Scoville at broker Price Futures said ahead of the briefing that "the market thinks USDA could cut production estimates slightly due to earlier stressful weather". The trade "also notes very good demand" for US cotton, he added.

The USDA indeed lifted its forecasts for US cotton exports in 2016-17 by 420000 bales to 14.9 million bales, and for newly-started 2017-18 by 700000 bales to 14.2 million bales.

Even so, the extra production fed through into expectations of US cotton stocks ending this season at 5.80 million bales, a nine-year high.

Analysts had, ahead of the report, on average forecast a downgrade in the inventory figure, to 4.80 million bales.

Favourable weather

The USDA also raised its estimate for Chinese production, by 1.5 million bales to 24.5 million bales (5.33 million tonnes), although this was less of a surprise to the market, after Beijing itself lifted its forecast for the crop earlier on August 11 by 180000 tonnes to 5.28 million tonnes.

Both Beijing and Washington officials flagged higher-than-expected Chinese cotton seedings, with the USDA saying that "official reports from China indicate a moderate increase in the area planted to cotton, specifically in Xinjiang and Hebei provinces, which benefited from favourable weather conditions".

While Chinese cotton area had declined "for the past five seasons in all cotton regions", as farmers responded to subsidy changes which cut the financial appear of growing the fibre, sowings had been encouraged this year by "higher cotton profitability". "Since the season began in April, most major cotton-growing regions have received normal to above-average rainfall," the USDA added.

Cotton futures tumble

In New York, December cotton futures, the best-traded contract, plunged to US 68.11 cents a pound – trading down the maximum 5.0 cents a pound allowed by exchange rules.

The contract in late deals stood just about that level, at 68.12 cents a pound, a drop of 4.2 % on the day.

Gaining enough momentum

Meanwhile, in New York-traded cotton, while analysts trimmed their forecast for fourth-quarter average prices by 0.8 cents a pound to 72.6 cents a pound, this implies further scope for the current price rally, which has taken December futures to 70.69 cents a pound.

"As growth in the global economy strengthens, worldwide consumption of cotton is projected to rise and should usher in a gradual increase in prices," FocusEconomics said.

"Mills in several Asian countries have already increased imports of US cotton by almost 60 % this year.

Separately, Tobin Gorey at Commonwealth Bank of Australia said that the cotton market "is now gaining enough momentum to attract buying from trend-following investors.