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Cotton Falls As Speculators Exit Market

Cotton futures prices fell to a two-month low Tuesday, with spot prices down more than 12% from their high reached in March. Investors are liquidating long positions before the spot contract expires, and taking profits after a recent uptick pushed prices to a one-year high last month.

The July contract was most active, closing down 1.05 cents to 85.10 cents per pound. In late session trading the price fell as low as 84.85 cents, as speculators exited the market, causing prices to fall.

The spot May contract dropped 1.65 cents on Tuesday, to 82.68 cents a pound. That’s more than 12% below the high of 93.93 cents seen on March 15th.

Analysts at the Wall Street Journal blamed the declines on a fall in global manufacturing data, indicating that speculators believe apparel production will contract.

Sharon Johnson, Knight Capital’s cotton specialist said, “There’s not a lot of trading today, but what we’re seeing is the long liquidation out of the May contract. The pressure is on the longs, they’re the ones running for cover.”

The spread between May and July expanded to 2.42 cents a pound, making it the highest second-month to front-month premium in over a month. May liquidation pushed the July contract down, according to dealers.

Open interest continued its seven-session decline, anticipating the May contract’s expiry on May 8th. First-notice day for delivery on the contract is Wednesday.

Stocks continued to climb, hitting 498,497 bales on Monday, according to ICE data. This is the highest level since June 2010, and may also be causing some bullish non-commercial dealers to pull back on their positions. May cotton is down almost 12% since hitting its one-year high on March 15th.

Commercial dealers were confident that U.S. weekly export data would be strong, despite selling in China and India. Those governments are the largest growers and holders of cotton worldwide, and their sales can have a significant depressing effect on prices.

The rally in the first quarter was partly due to a perception of tightening supplies in non-China markets, and by a belief in solid and growing demand for the fiber. More than half of global stocks are believed to be held by the Chinese government and are considered unavailable to the general public.

Trading volumes were below average Tuesday, at 21,000 contracts versus a 30-day average of 24,000, according to Thompson-Reuters data.