Cotton Hits Fresh Decade High Fueled by Mill Short Covering

(Bloomberg) -- Cotton futures touched a fresh decade high Monday, with a global deficit of the fiber squeezing mills holding huge short positions.

The March contract climbed as much as 3.2% to $1.2771 a pound in New York, the highest for a most-active contract since June 2011. Its rare premium over May futures has risen 58% this year and is 275 times more than a year ago, showing buyers' urgency to buy for nearby delivery. 

Amid two expected world deficits, mills are holding large, short positions as indicated by government data on unfixed call sales for the marketing year ending July, and they must be bought using options or futures by then. 

That's the main reason behind the latest surge and could take prices toward $1.30 or $1.35, or even higher,” said Peter Egli, the Chicago-based director for Plexus Cotton Ltd. “It's hard to tell how far a short covering rally can go. This a fight between longs and shorts.” 

Drought across West Texas and Oklahoma continues to intensify, and the market is closely watching because that could affect planting and yield prospects for 2022-23, said Louis Rose, director at Rose Commodity Group. 

Higher input costs have also raised doubts on whether growers will plant more this year even with the higher prices. Tennessee-based National Cotton Council will release its initial projection for domestic planting on Feb. 13. 

Demand for yarn, both in the U.S. and around the world, “is simply not being met,” said O.A. Cleveland, a consultant and professor emeritus at Mississippi State University. Domestic spinners are facing a shortage of trucks to move the fiber, and that's been the main impediment in reaching government export projections.  

In other soft commodities, orange juice futures continued to retreat from the highest levels since 2018 even as frost hit groves in Florida over the weekend. U.S. consumption continues to slump, extending a long downward trend that started a couple of decades ago and mitigating the impact of any potential losses from the chill.

Orange juice for March slid as much as 4.9% to a two-week low of $1.441 a pound, before regaining some of the ground.  

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