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Cotton Prices Looking Like 2008

Cotton prices are up 18 percent for the first three months of 2013, but fell Thursday as investors took profits before the long weekend. The gain is the biggest in two years, with prices up 6 percent for March alone.

The rally was spiked by a USDA report forecasting a 20 percent fall in planted cotton acres this year. The report was widely expected to produce the jump in buying. Prices topped out at 90 cents per point as technical selling thresholds were reached.

The US May cotton contract on ICE Futures was the most active, sliding .08 percent before the close and landing at 88.46 cents per pound. Trading is closed for the weekend due to the Easter holiday.

Last year at this time prices were stable or falling as supply was widely forecast to exceed demand. Overall, 2012 was a loss year for cotton, but the last three months of gains have pushed the commodity to levels last seen in 2008.

The USDA report indicates that farmers are switching to higher priced grains such as corn and soybeans, and total acreage is expected to fall to around 10 million acres. From an investment perspective, the report was widely anticipated, but the concrete release of the number did spark a small bullish rally.

U.S. corn prices had the opposite trend as the government forecast a total acreage last seen in 1936 and prices sank 5 percent on oversupply fears.

The rally in prices may prompt cotton farmers to increase late season plantings, and, indeed, they may already be responding to that incentive. There was a risk that plantings would fall below 10 million acres, but they seem to have remained above that psychological threshold.