US cotton futures tumbled again on Wednesday, with most of the decline in nearby contracts attributed to switches ahead of first notice day, and some brokers said negative technical charts and ample supplies anticipated in the global market have also pressured prices. While a dry spell in the Southern United States, especially top US growing state Texas, put a floor under price declines, a rain shower could lead to even steeper drops.
"It's really dry out here in West Texas, and if the crop gets a good rain prices will get whacked. At least 10 to 15 cents of the price is dry weather," said Jobe Moss of MCM Inc in Texas. The front-month May cotton contract on ICE Futures US tumbled 6.65 cents to finish at $1.8377 per lb. Most-active July was also sharply lower, falling 4.10 cents to end at $1.6740 per lb.
New-crop December cotton settled with a small 0.29 cent gain at 99.90 cents per lb. Brokers were somewhat puzzled about the degree of the price drops. But, with first notice day for May futures approaching on Monday and one more day left to trade the contract with markets closed for the Good Friday holiday, many players holding May cotton have been anxious to sell out all week.
"The whole thing has been the May/July switch. The switch has gone from 4 or 5 cents up to 19 cents. And we're talking about switching from old crop to old crop, which is crazy," said Moss. Technically, both May and July futures also look negative. Both formed a head and shoulders top, whose necklines were definitively broken on Wednesday.
Moss said the July neckline break pointed to a decline that could lead it down to about $1.48 a lb. Moreover, ample crops from the Southern Hemisphere were expected to come to market soon, with large supplies anticipated from Australia, Argentina and Brazil. The decline in US cotton prices has partly been a reaction to the additional supplies expected in the global market.
In addition, US projected plantings for cotton has been increased to 12.6 million acres in the 2011/12 crop year from 10.9 million acres in the 2010/11 crop year, which would only exacerbate the potential for over supply, brokers said. Trading volume slipped to 26,859 contracts, down from 34,202 lots that changed hands on Tuesday, according to Thomson Reuters preliminary data.
A mostly dry weather outlook for Texas over the next five days, with temperatures near to above normal, could compromise the yield in the biggest US growing state. Weather forecaster DTN Telvent said more rain was needed in cotton growing regions of the US Open interest in the cotton market dropped to 172,140 lots from 182,494 lots as of April 18, ICE Futures US data show. May open interest stood at 21,802 lots by the end of April 19.