Cotton futures finished higher on Friday on investment fund and possible mill buying as the market finished the week up 1.7 per cent, near a 15-year peak, with traders looking toward the return of No. 1 consumer China to the market after a holiday break.

Cotton, which surged past the $1 per pound level this week although it settled just shy of that mark on Friday, drew support during the session from a broad surge in stocks, gold and crude values and a weaker dollar.

Cotton rallied to a 15-year high this week due to strong demand, tight cotton stocks and heavy buying by investment, hedge and long-only funds who view the market as undervalued.

"We're seeing a lot of bullish (momentum) in commodities," said Bill Nelson, an analyst for investment and farm commodities consultancy Doane Advisory Services in St. Louis, Missouri.

For the fourth time in five session, cotton futures traded over $1/lb, climaxing a surge that saw the market gain over 40 per cent in value since the rally took off in late July 2010.

ICE Futures US key December cotton contract gained 2.76 cents to finish at 99.93 cents per lb. On the week, the market was up 1.74 per cent.

Volume stood at 15,553 lots at 2:43 pm EDT (1843 GMT), barely lower when compared to the 30-day average of 15,862 lots, according to preliminary Thomson Reuters data.

Analysts believe the market's next move will depend on No. 1 consumer China and No. 2 cotton producer India. Talk circulated in the US cotton trade that Beijing will hold discussions early next week about speculation in commodity markets.

"The Chinese come back (on Monday), so we'll see where we go," said Raffety.

The problem is that trading in China will be shortened next week because the Asian country would again be on holiday from October 1 to 7.

The market also wants some clarity on what India plans to do about cotton exports and whether it would start on October 1 or on January 1, 2011.

Nelson said there could be "nasty consequences" if China clamps down on speculation in the cotton market. Such a move would cool down prices of fiber contracts, and traders believe that would give Chinese mills an opportunity to buy cotton at lower prices.

Still, many market watchers remain bullish on cotton, saying demand from overseas buyers and purchases by funds which believe prices will rise further should support cotton prices.

Macquarie Commodities Research said in a report that even though cotton plantings will rise next season due to high prices, "we think much of it will get quickly absorbed into mill use or export sales, leaving little scope for stock replenishment."

It added: "Thus, barring any economic downturn ... the global cotton market will remain very tight. With little buffer, cotton remains susceptible to prices breaking out on the upside to counter any supply disruptions."

There was no sign of a major change in positions in the cotton market, according to data from ICE Futures US Open interest fell 1,209 lots to 235,919 lots as of Thursday.

Some market watchers are bearish, saying the coming US harvest and cotton exports by India should depress cotton prices. – Reuters