US cotton futures jumped about 4 percent for a second straight session on Wednesday, hitting a five-month high, on worries of a near-term supply squeeze from delivery of poor quality fibre to the market. Concerns that cotton from the early harvest of fields in the south-eastern United States had high levels of "micronaire", or coarse fibres that could break during the spinning process at textile mills, has sparked a rally since the week began.
The most-actively traded cotton contract on ICE Futures US, December, rose the daily limit high of 3 cents a pound to 77.86 cents. It was the highest level for a front-month contract in US cotton since May 15. Traders said December cotton had potential to move up to May's highs of above 80 cents a pound if the rally persisted, cautioning that such high prices could scare away millers.
"This is the absolutely worst thing that can happen to demand as mills will not chase price but use more synthetics in their fibre mix," said Sharon Johnson, cotton specialist at Knight Futures in Atlanta, Georgia. Cumulatively, December cotton has gained 5.52 cents, or 7.6 percent, over the last two sessions. Cotton has outperformed other commodities in US trading, topping for a second day winners on the Thomson Reuters-Jefferies CRB index which tracks 19 raw materials markets.
Trading volumes have also been extraordinary. Thomson Reuters data showed volumes in ICE cotton at above 21,844 lots by 1:10 pm EDT (1710 GMT), nearly 175 percent higher than the 30-day average. On Tuesday, volumes crossed 54,000 lots, or 220 percent above the monthly norm. Just last week, cotton prices appeared doomed after the US Department of Agriculture (USDA) issued one of its bleakest reports on the crop in decades. All that changed with the rising micronaire levels in cotton delivered to the market. Data showed that as of October 11, some 2.23 million running bales of cotton had been ginned, or gone through the process where fibres are separated from seeds.
Of these, just about 46 percent were considered tenderable, guaranteeing a market for producers. "The percent of cotton that can be delivered ... is much lower than I have seen in many years," Johnson, of Knight Futures, wrote in a market commentary. "It is 'high' mike (fibre width) that is behind the quality issue." The USDA report marked the third month in a row that the agency had increased its estimates for world-wide stocks of cotton since the new marketing season started on August 1. The latest revision put ending stocks 14 percent higher than 2011/12's 69.56 million bales.
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