The US Department of Agriculture raised by 2.9m bales to 54.8m bales its estimate for world cotton stocks at the close of 2011-12, citing both higher production hopes and reduced expectations for demand, which was already "sluggish", besides being vulnerable to weaker hopes for world economic growth.
The upgrade left cotton’s stocks-to-use ratio, a key metric for judging a commodity’s availability and therefore the prices it can command, at nearly 48%.
The USDA’s previous estimates had pegged the figure at a tighter 45%, with the ratio at the close of last season, which witnessed a spike in prices above 200 cents a pound, at 39%.
‘Writing on the wall’
The data was viewed as potentially capable, with help of technical factors, of pushing cotton prices back to 90 cents, said Keith Brown, the president of Keith Brown & Co, a brokerage in Moultrie, Georgia.
"Certainly, we can state that the writing is on the wall for the cotton market, in terms of increased supply and lower demand," Mr Brown told Agrimoney.com.
It was important that New York’s December cotton futures contract did not breach technical levels at 98.90 cents a pound and 96.20 cents a pound, based on long-term trend lines, if it was to avoid a further sell-off.
The lot dropped to 99.67 cents a pound after the data were released before recovering some ground to stand at 100.82 cents a pound in late deals, down 2.6%.
Rabobank analysts, terming Wednesday’s figures "strongly bearish", said that "for cotton prices to remain elevated, support must come from user buying or concerns that a steep correction lower would result in much lower planted area in the spring planting season".
The USDA data, released in its monthly flagship Wasde crop report, revealed a rise of 500,000 bales to 3.90m bales in domestic stocks at the end of the season, helped by an upgrade to Georgia’s production hopes.
However, Mr Brown said the "more bearish" surprise was the upgrade in inventories for the rest of the world, supported by an upgrade in Australia’s harvest to a record 5.0m bales.
"Last month, the USDA reduced rest of the world stocks by about 750,000 bales.
"Now 30 days later, they have felt the need to put that back in, and added some 1.5m bales on top."