Climbing exchange stocks ease worries over tight U.S. cotton supplies

Mon Oct 14, 2013 3:36pm EDT

* ICE inventories increase to highest since August

* Market moves into contango for first time in four months

* Rising stocks stoke worry over canceled orders

By Chris Prentice

NEW YORK, Oct 11 (Reuters) - Cotton exchange stocks rose last week to the highest since August, returning the market to a contango for the first time in four months and quelling concerns about dwindling supplies as U.S. traders await the late arrival of the 2013/14 crop.

Even so, the sudden injection of supplies has reignited concern over canceled orders and faltering demand for cotton, which has faced growing competition from lower-priced, synthetic fibers in recent years.

Certified stocks rose to more than 24,300 bales by Friday, with another 35,700 bales awaiting review by the U.S. Department of Agriculture, the most recent IntercontinentalExchange data showed on Monday.

That has lifted available inventories by about 11,500 bales in one week to the highest since August and is the first sign of a significant return of supplies since exchange stocks fell precipitously from nearly 623,900 bales in early July, data compiled by Reuters show.

"Rumor has it that this inventory will grow to at least 150,000 to 200,000 bales over the coming weeks," Peter Egli, director of risk management for British cotton merchant Plexus Cotton Ltd, said in a report.

As of early October, total exchange inventories had plunged to 11,900 bales, the lowest since November 2012.

This summer's steep drop in exchange inventories was particularly troublesome for the cotton trade, as the U.S. crop is expected to be the smallest in four years and late because of unfavorable weather.

The sudden arrival of the bales returned the market to a contango last week for the first time in four months, making it less costly for merchants and users to pay the cost of warehousing, or carrying, the cotton.

"You probably could hear the collective sigh of relief from the trade as that happened," said a U.S. trader.

The December contract on ICE Futures U.S. traded at a discount of 0.95 cent a lb to the March, up from 0.85 cent a lb on Friday and a premium of 0.05 cent the previous week.

The December contract had been trading at a premium to March since June, as concerns built over upcoming supplies in the United States, the world's top exporter, and as a certified stocks fell steeply following a large July ICE delivery.

CANCELLATIONS, MISSING DATA

The bulk of the climbing inventories are expected to be cotton from the 2012/13 crop year, ended July 30, as harvesting of the new crop is just now under way, traders said.

At least a portion is expected to be supplies that Switzerland's Glencore Xstrata Plc bought this summer through the July exchange delivery and purchases in the cash market. A spokesman for the company declined to comment.

The rise is being taken by many as a signal of order cancellations, as any buyer of cotton has to have sales booked to take bales from the exchange stocks, per the Commodity Futures Exchange Commission's hedging exemption rule.

Bales can be returned to the exchange if there are canceled orders, if fiber from elsewhere is substituted, and if the cotton does not meet the quality of a commercial sale.

Talk of cancellations has led to renewed worry about slowing demand and ballooning global supplies.

"We're not seeing demand for these," said the U.S. trader. "If there was demand, you wouldn't see this in the certified stock."

Recently, high prices above 84 cents a lb have damped buying, particularly in top consumer China, where the government is considering overhauling its stockpiling program, which has driven voracious demand for imports.

Without weekly U.S. export data from the USDA because of the government shutdown, cancellations have become guesswork for the trade.

Traders have missed two weeks of the U.S. export sales data, used as an indicator of export demand. On Friday, they had to cope without the monthly supply and demand report.

"We don't know what kind of export volumes we're doing, and we don't have a crop condition report. There's a lot that's uncertain right now," said Jobe Moss, a broker with MCM Inc. in Lubbock, Texas.

"But there's just way too much cotton. The climbing stocks are telling us the new direction is probably going to be down for this market."

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