Light volumes have partially exaggerated the move lower, but brokers also attributed it a pause before another move higher, traders said. "If you want to inhale, you have to exhale," said Ron Lawson, a cotton trader and partner of commodities investment firm LOGIC Advisors.
The most-active March cotton contract on ICE Futures US settled down 1.35 cents, or 1.77 percent, at 74.66 cents per lb after falling to a two-week low of 74.62 cents. Even so, fibres were on track for their best quarterly performance since the first quarter 2011 when the market peaked above $2.2 per lb, levels not seen since the US Civil War in the 1860s.
That surge, due to a combination of Chinese demand and a squeeze in US supplies, set off a string of events from a massive wave of planting to contract defaults, whose repercussions continue to rock the market. But in the short term, merchants attribute recent speculative and trade interest to three factors: strong demand from China, the world's largest textile industry; buying due to index rebalancing early in the new year, and expectations of a significant drop in US planted acreage.
With only US cotton deliverable on the ICE exchange, a severe cut in sowing by farmers in the world's third-largest producer could have a significant impact on futures even if there is an excess in the rest of the world. Analysts expect a record global surplus of just under 80 million 480-lb bales by July 2013. Reinforcing hopes of healthy demand, US weekly sales data released on Friday showed further interest from China, which accounted for half of the 283,300 running bales sold in the week to Thursday.
That total was down 15 percent from 333,000 bales in the previous week, but some investors were relieved foreign demand had not dried up over the Christmas holidays. Friday's Commodity Futures Trading Commission data also revealed the extent of the speculative short covering that was behind the recent run-up.
The non-commercial dealers raised their net long position in cotton futures and options by 3,853 contracts to 27,740 contracts the highest since September 2011. Most of the increase - 3,446 lots - was due to a reduction in short positions. Elsewhere, financial markets were on tenterhooks as US lawmakers launched last-ditch talks to hammer out a budget to prevent the world's largest economy tipping over a "fiscal cliff". The dollar rose, US Treasury yields hit two-week lows and stocks on Wall Street headed for their longest losing streak in three months as the politicians sought to avoid $600 billion in tax increases and spending cuts set to take effect on January 1.