The recent rally in cotton futures could prove short-lived, analyst suggested, with little fresh bullish news and a big question mark hanging over US export prospects.
US government export projections are being called into question, as the pace of Chinese import demand slows.
And stalling momentum in the New York cotton markets could encourage a wave of investor selling.
“We see further potential for correction,” Commerzbank said.
Chinese imports slump
Chinese cotton imports in June were down 55% year on year, at 72,750 tonnes.
Imports over the first half of 2016 were down 54%, at 431,250 tonnes.
“A sharp fall in domestic prices and lower import quotas for tax-free imports are responsible for the slump in imports,” said Commerzbank.
State auction flood market
“Instead, cotton manufacturers in China are currently drawing on the high domestic stocks that the state has been auctioning off since May.”
The Chinese government is planning to auction off 2.0m tonnes of cotton from its massive state-owned inventories, accumulated during a defunct price support programme.
Some 1.4m tonnes of cotton have been auctioned off so far.
In the latest auction, held on Thursday, the government sold all 28,800 tonnes of cotton made available, at an average price of 15,116 yuan a tonne, about $2,265.
Chinese cotton futures finished down 0.3%, at 15,420 yuan a tonne.
Slower Chinese buying threatens the rally in New York cotton markets.
“Against this backdrop, the US Department of Agriculture’s latest assumptions about US cotton exports appear overly ambitious,” Commerzbank warned.
The USDA’s latest forecast for the 2016-17 crop year saw booming US exports, at a four-year-high of 2.5m tonnes.
The news triggered a rally in New York cotton futures, which hit a two-year-high of 75 cents a pound last Friday.
Cotton prices have fallen back a little, with December cotton futures in New York trading at 72.65 cents a pound overnight.
“The market’s spectacular rise from the ashes has been driven almost entirely by investor buying,” said Tobin Gorey, at CBA.
“Stalling momentum could quickly turn them into sellers,” Mr Gorey warned.
“The market now needs some fresh news to keep long investors placated.”
Markets guess at Chinese crop damage
Still, Mr Gorey did suggest that “perhaps the impact of heavy flooding in China’s Yangtze River Basin will do the trick”.
“Weather forecasters estimate that more than a quarter of China’s cotton crop has been impacted, to varying degrees, by the excessive rainfall seen in early July,” he said.
“Official estimates of crop losses are probably still a few weeks away but that will not prevent the market from taking a guess at the damage.”