Cotton prices are expected to continue to move sideways in the coming months, as higher stocks over the coming year are likely to be offset by rising demand in emerging markets and Chinese buying interest.

The prediction follows the latest supply and demand estimates from the US Department of Agriculture (USDA), which sees a 2.9m bale increase in world ending stocks in the 2011/12 season. The figure reflects an 896,000 bale rise in ending stocks, a 1.2m bale hike in world production, and a 844,000 bale drop in consumption.

But instead of putting additional downward pressure on prices, experts at Cotton Incorporated have pinpointed a number of factors that should limit this.

At 54.8m bales, the current estimate for world ending stocks in 2011/12 is 10.0m bales higher than the season before. With this increase, ending stocks will have reclaimed nearly 60% of the loss that occurred in 2009/10 - and an improved stocks-to-use ratio to 47.9% means there should be enough cotton available to prevent prices from developing an upward trend.

Difficult macroeconomic conditions in traditional end-use markets, including the US, Europe, and Japan, is keeping demand weak. But some of this may be offset by growth in emerging markets, although it is unlikely to fully alleviate pressure on order volumes.

Compounding the effects of the weak macroeconomic environment are rising prices for a range of consumer goods. Not only are the world's consumers facing the first significant increases in apparel prices for more than a decade, they are also facing elevated prices for necessities like energy and food.

And a move by the Chinese government to begin building up the country's cotton reserves is also likely to help avoid fluctuations in cotton prices, Cotton Inc says, since the price guaranteed by the Chinese government (minus charges for taxes and shipping costs) roughly corresponds to values on the New York futures market near 100 cents/lb.

Cotton prices for the New York December futures contract have been trading within a range between 98 and 104 cents/lb. A Index values have also been moving sideways, holding values between 111 and 114 cents/lb.