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Cotton Declines 17%; Uncertainty Remains Over Stockpiles in China

Cotton edged slightly higher on Monday but finished 17% down in 2012, posting the third-biggest annual decline among commodities, as the market struggled with oversupply and sluggish demand.

Even so, the commodity rose 8.6% in the fourth quarter in a late year-end rally as speculative investors bet on higher prices amid hopes for more buying in 2013 from China, the world's largest consumer and producer, and expectations that farmers will plant less cotton in the spring in favour of higher-priced grains. It was the biggest quarterly gain for cotton prices since the first quarter of 2011.

On Monday, benchmark US cotton futures rose 0.48 cent, or 0.64%, to settle at 75.14 cents per lb. Cotton's 17% annual decline was the third-steepest slide among the 19 commodities tracked by the Thomson Reuters-Jefferies CRB index, after arabica coffee futures and US orange juice futures.

Cotton also fell more than 36% in 2011. An earlier rally to lofty price levels had boosted sowing and decimated demand, while a shaky global economy scared off investors. This year, the US government forecast a record surplus of just under 80 million 480-lb bales by the end of the 2012-13 season to end-July 2013.

Cotton enters the New Year with questions over China's policy towards stockpiling and forecasts that farmers will grow more wheat and soya beans, which posted the biggest price gains among commodities in 2012 as the worst drought in more than half a century hit the US corn belt.

Analysts said many farmers will find it profitable to switch to grains from cotton. 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.

 
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