Investors may have overdone their gloom at prospects for cotton prices, which may prove more resilient than had been feared thanks to stockpiling by China, the top consumer of the fibre.
Standard Chartered restated a forecast that New York cotton futures will maintain a downward path, averaging 166 cents a pound for the year compared with a price on Thursday of 185 cents a pound for the near-term May contract.
New York cotton hit a record 227 cents a pound last month, up 175% year on year, supported by a fall in stocks in the US, the top exporter, to a record low in 2010-11.
"We look for prices to trend down as global supply improves, particularly in China but also Pakistan," the bank said.
'Limited risks'
However, investors may be factoring in too gloomy an estimate for prices in the fourth quarter of 2011, which will average 140 cents a pound, some 10 cents above the current level that New York's December lot is trading at.
Although supplies will be improved by increased sowings in many major producing countries, including the US, prices will gain support from a seven-month Chinese programme of cotton stockpiling set to start in September.
The scheme will activate state purchases of cotton at 19,800, equivalent to about 140 cents a pound, yuan a tonne whenever Chinese futures prices fall below that level for five working days.
"Downside risks [to cotton prices] will be limited by the price stabilisation policy in China," Standard Chartered said.
Furthermore, the bank said it expected cotton supplies to stay "tight" in 2011-12 despite the rise in sowings, although this squeeze "will not be fully apparent until later in the season when new crop stocks are drawn down".
'Too dry'
Indeed, China, which is also the top cotton consumer and producer, has designed its stockpiling programme to encourage domestic sowings, over which there have been doubts given the attractive returns to be gained from growing grains, and the losses growers ran up in 2008 ramping up in the fibre.
In the US too, the official forecast for spring sowings of the fibre, at 12.6m acres, is short of initial expectations, a shortfall blamed on a reluctance by farmers to splash out on specialist cotton equipment to exploit a price rally which may not last for long.
And much of the land in America's southern cotton heartland that has been allocated to the crop is not being sown amid a drought in many areas. Farmers in Texas, the top growing state, had sown 12% of their cotton as of Sunday, down from a long-term average of 16% by now.
"Conditions remain too dry for planting in non-irrigated areas," Terry Roggensack at Hightower Report said.
Chart signal
Mr Roggensack added that, technically, for New York's old crop cotton contracts "the path of least resistance is still down", with levels of open interest "on a slight decline" and speculators holding a large net long position.
The July contract, which stood 0.01 cents lower at 167.05 cents at 14:10 GMT, had "147.88 cents a pound as a longer-term downside target", to judge by signals from a so-called head-and-shoulders chart pattern.
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