NEW YORK: US cotton futures finished lower on Friday, caught in broad commodity market selling, but also as buyers who had driven prices up to their trading limit in the last two days reviewed some bearish fundamentals to rethink their strategies.
Cotton's short-term price volatility has mostly been dominated by speculative traders, many of whom had been increasing short positions throughout May, when prices fell about 20 percent.
But with a rebound in sentiment across the commodity spectrum earlier this week, cotton benefited as speculative players covered those short positions and drove prices to their 4-cent daily limit two days in a row.
"When people say risk on, risk off, it's really fear on, fear off as they try to figure out what's happening with the European debt situation. That's what we're dealing with right now," said Ron Lawson, managing director of logicadvisors.com.
The dollar's gain on the euro pressured dollar-denominated cotton along with other commodity prices. The euro took a battering after a three-notch cut to Spain's credit rating on Thursday and signs of weakness in Italy and Germany.
Benchmark December cotton on ICE Futures US slipped 2.4 cents, or 3.32 percent, to end at 69.88 cents per lb. The trading range spanned 68.70 to 71.97 cents per lb.
December's contract volume was large at 29,367 lots, due in part to rollovers into December futures and out of July.
Spot July cotton closed at 72.90 cents a lb, down 99 cent, or 1.34 percent, on robust volume of 25,739 lots.
After two days of steep rallies, cotton prices weakened as market fundamentals kicked back in along with the influence of European worries. December finished with an inside trading session -- meaning a lower high and a higher low -- and July futures with a more modest decline.
July cotton, which marks the last of the 2011/2012 marketing-year crop, looks like it may come up short and the new 2012/2013 crop year is projected to end in a surplus.
"For July, we're in a situation where we've already exceeded the export sales the USDA (US Department of Agriculture) says we will make," Lawson said.
He said a case could be made that there will be insufficient cotton to satisfy the July contract deliveries, though he cautioned that scenario may not become reality.
"Conversely," he said, "December is facing one of the biggest carry-outs of the new crop that we've ever seen."
The USDA is predicting a surplus of 73 million bales by the end of the 2012/2013 crop year, one of the largest ever.
Cotton market participants will be keenly watching the USDA's monthly supply/demand report on Tuesday to see whether that carry-out figure will be downwardly revised. If not, December futures could suffer heavy losses again.
Late on Friday, the US Commodity Futures Trading Commission reported that ICE cotton speculators trimmed net short positions by 227 contracts to 3,783 in the week ended June 5.
Given that much of the week's short-cover buying occurred on Tuesday and Wednesday, that number will likely be much larger next week.
Elsewhere, forecasters said they see fewer storms for this year's Atlantic hurricane season, as well as a 50 percent chance El Nino will strike this year.
Open interest, a reading of investor interest, slipped on Thursday by 119 to 203,115 lots from 203,234 on June 6. It remained near last week's highest level since Feb. 10, 2011.
Friday's volume came to a lofty 58,869 lots, about 138 percent more than the 30-day average, and followed 64,040 lots on Thursday, Thomson Reuters data showed.
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