US cotton ends off on profit taking, support holds

"I didn't think supply and demand issues were behind the rally earlier this week. This is where we draw a line in the sand and see whether (support levels) hold," said Sharon Johnson, senior cotton analyst at Penson Futures in Georgia.

"If not, the run up was more of an anomaly," she added.

Key December cotton futures on ICE Futures US was down sharply at the end, falling $2.69, or 2.52 percent, to $1.0416 per lb.

Setting an inside day on technical chart, a lower high and a higher low, which meant it failed to return to the near three-week peak set a day earlier.

Volume in the benchmark contract was a moderate 7,460 lots, almost half the 13,679 lots traded as December cotton rallied.

Across the board, preliminary volume at 10,144 lots stood well below the 16,834 lots traded on Tuesday and 30.6 percent below the 30-day average, according to ICE Futures US data.

Open interest in the cotton market increased to 144,447 lots as of Aug. 2, exchange data showed.

Some investors may have been hasty in their purchases of cotton, along with other agricultural commodities, following Tuesday's passage of a measure to raise the US debt ceiling and address the huge deficit, and decided to take profits off the three-week highs reached in the rally.

At the same time, Johnson said, the softer prices may leave room for more buying going forward.

With mixed factors tugging prices in both directions, Thursday's action may be critical to cotton's near-term fate.

"You had a sort of one, two, three punch. You had concerns about the debt ceiling deal and further easing by the Federal Reserve. You had a technically oversold condition. And, you had a seasonal pattern of a preharvest low followed by a rally into August," said Johnson.

At the same time, drought conditions in Texas and other cotton growing regions in the United States, that the US Department of Agriculture estimates will destroy about 30 percent of the crop, could keep December futures prices supported.

Next week, the USDA will release its monthly production report with updates on how much of the US crop has been destroyed by hot and dry weather.

Meteorlogix, DTN's commercial weather service, said, "extreme heat and drought will have a major impact on cotton production across West Texas this year with virtually no dryland production and sharply reduced irrigated production."

Elsewhere in the world cotton is plentiful, however.

On Thursday at 8:30 a.m. (1230 GMT), USDA will release its weekly export sales figures.

Copyright Reuters, 2011