Cotton rallies on tight nearby supplies, USDA report expectations

Cotton futures notched their biggest one-day rally in 2-1/2 weeks on Monday, lifted by tight nearby supplies. The most-active December cotton contract on ICE Futures US closed up 0.74 cent, or 1.2 percent, at 65.05 cents a lb. The concern over near-term supplies was seen in spread-related gyrations that have lifted the second-month ICE contract to a premium above third-month March futures
in the last week. That premium edged up to 0.32 cent a lb on Monday from 0.17 cent a lb on Friday. "The (supply) pipeline is empty, and farmers aren't selling," said Peter Egli, director of risk management at British merchant Plexus Cotton Ltd. "The market's gotten way ahead of itself."
Farmers have paused their selling due to a price rout. The benchmark December contract has slumped about 20 percent from May highs near 85 cents a lb as expectations have risen that US farmers will harvest a bumper crop this year as demand in top consumer China drops due to an overhaul of a government stockpiling policy that has driven voracious import demand. ICE stocks continued to slide to the lowest levels since January. They slipped to 63,238 bales on Friday from 63,355 bales previously, the most recent ICE data showed.
Australia's cotton production for the 2014/15 crop year will drop 35 percent to a five-year low of 580,000 tonnes, the nation's chief commodities forecaster said on Monday. The lowered forecast was widely expected as Australian farmers have been battling extreme dry conditions in many cotton growing areas. That was further bolstered by positioning ahead of a US Agriculture Department (USDA) supply-demand report due on Thursday that is widely expected to show a slightly reduced output forecast for the United States, the world's top exporter.
The USDA last month hiked its projections for US supplies to a four-year high of 17.5 million 480-lb bales in the 2014/15 crop year that began on August 1, heightening concern that inventories will continue to balloon this year as global supply again outpaces demand.