UPDATE 2-U.S. cotton sinks on China, higher margins

NEW YORK, Nov 12 (Reuters) - U.S. cotton futures slid for a third day in row on Friday as lower Chinese cotton values and a sharp rise in U.S. margin rates took their toll, possibly ending the market's four-month-long rally, analysts said. Cotton prices had rallied since July and scaled levels this week unseen since the U.S. Civil War in the 19th century. The benchmark March cotton contract on ICE Futures U.S. fell the 5-cent trading limit to $1.3418 per lb. The session high was $1.3655. Despite the massive sell-off, the U.S. cotton market on ICE Futures U.S. was still the top performing commodity on the Reuters Jefferies Commodity Index, having risen more than 75 percent year to date. (Graph: http://link.reuters.com/kew48n) Bill Raffety of commodity brokerage Penson Futures said cotton suffered because of news of weaker Chinese prices, a requirement by banks to increase their reserve funds, and fears of an interest rate hike in China. "That's why you've got additional selling coming in," he said. The Zhengzhou Commodity Exchange's May cotton contract was last traded Friday at a session low 29,290 yuan per tonne, down 2,380 yuan on the day. On Thursday, the contract had lost 1,650 yuan. "(Speculative) capital has been withdrawn from the market. Without the capital support, the price is now more in line with physical prices," said Yang Guoqi, an analyst with Jinshi Futures Co Ltd. China's Central Bank ordered banks to set aside more money as required reserves, a tightening step that mops up some of the cash that has been flowing into commodities markets and posing a growing inflationary threat. A major factor in the U.S. market weakening was the nearly 30 percent increase in cotton margins since Oct. 26 by ICE Futures U.S. This brought cotton margins to their highest level since 1996. "The table's got too expensive," said Sharon Johnson, cotton expert at First Capitol Group in Atlanta, Georgia. She said the spike in margin rates would discourage fresh business from coming into the cotton market and force many investors to cash in their gains. (Reporting by Rene Pastor in New York, and Niu Shuping and Tom Miles in Beijing; Editing by Walter Bagley) ((rene.pastor@thomsonreuters.com; +1 646 223 6047; Reuters Messaging: rene.pastor.reuters.com@reuters.net)) For related news and prices, click on the codes in brackets: ICE cotton futures RELATED NEWS AND OTHER TOPICS All cotton news Grain/oilseed/cotton news Cotlook Daily All commodities news Grains diary Weather news Foreign exchange rates China cotton China's cotton futures NYMEX cotton Keywords: MARKETS COTTON (For help: Click "Contact Us" in your desk top, click here or call 1-800-738-8377 for Reuters Products and 1-888-463-3383 for Thomson products; For client training: training.americas@thomsonreuters.com ; +1 646-223-5546) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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