While physical buying has picked up, investor interest in futures has waned. Open interest, the number of contracts outstanding, has slumped to January lows around 160,000 lots.
---- Concerns about record surplus continue to weigh
To be sure it is typical for open interest to drop after options expiry, but prices stuck in a 5-cent range and an absence of liquidity in the forward price curve have kept specs on the sidelines. Investors are also cautious ahead of the year-end particularly after talks over the US budget stalled on Friday as President Barack Obama and top Republicans remained at odds about how to avert a series of tax hikes and spending cuts next year that could push the economy into recession. That also sent US stocks lower.
Cotton's second month of gains also defied the heavy selling in wheat, which plunged for another four weeks. The most-active March contract on ICE Futures US rose 0.56 cent, or 0.76 percent, to settle at 73.91 cents per lb on Friday on fund rebalancing ahead of the month end. Price gains were capped at 74 cents.
The close above last Friday's settlement of 71.43 cents per lb bodes well for fibres next week. "Assuming it holds above the 50-day (moving average) in Friday's session, which will also constitute a higher weekly close, additional spec buying is likely," said Sharon Johnson, cotton specialist at Knight Futures.
Even so, it's been another poor year for cotton as the market braces for a record global surplus in the marketing year to July 2013. Year to date, cotton is down 17 percent and the third-worst performing asset, behind coffee and orange juice, out of 19 commodities in Thomson Reuters-Jefferies CRB index.
That is building on a more than 36-percent drop last year when fibres were the worst-performing commodity as record prices boosted output and decimated demand while a shaky global economy scared off investors. The wild price swings of the past three years have done long-term damage to demand, with mills using less cotton in their blends in favour of cheaper manmade materials.
This year's weaker prices may eventually work in the market's favour though. Next year, farmers are expected to plant less fibres in favour of grains after the soaring prices earlier in the year due to the drought. That will help to eat into the over 84-million bale surplus forecast by next July.