Is the cotton industry hedged against an eventual decline in prices?

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Investors may be falling out of love with cotton

Cotton producers and exporters in West Africa could be vulnerable to a correction in cotton prices after speculators sharply reduced their long positions on the New York Intercontinental exchange (ICE) for the week ending October 11. According to data from the US CFTC, cotton investors trimmed their longs by around 10% compared with the week before. This suggests that speculators are less bullish on the fundamentals in the cotton market. Investors also cut their positions in cocoa, coffee and sugar markets but to a lesser extent. Burkina Faso, Mali, Benin, Cote d’Ivoire and Cameroon are the top 5 cotton producers in the region.

With an eye on China

Investors may now be betting that China’s cotton imports will remain weak even though there are signs of a widening production deficit in the Chinese market. China is the largest producer and consumer of cotton and is likely to continue destocking some of its huge reserves in order to feed domestic demand. Out-of-quota tariffs for cotton imports into China remain prohibitively high for many cotton producers eyeing the Chinese market.

FTcottonPrices are off their highs

ICE no. 2 cotton futures were last trading at 71 cents per pound or 930 CFA frs per kilogram. This is down around 10% from the high of 77 cents per pound reached at the start of August. Cotton prices have been one of the better performers in the agricultural complex this year and, despite the decline, are up 10% compared with market’s level at the start of the year.


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