Weekly Commodity Market Recap: Cotton

While the longer-term trend may point to firmer prices for cotton, outside influences weighed on the market in the latest week. In particular, a rising dollar, weaker commodity prices, and sharply lower grains sapped enthusiasm for continued near-term strengthening in cotton. The dollar saw one of its biggest weekly gains in almost six months, as concern over unimpressive EU plans to stimulate demand in Europe and a second straight monthly gain in consumer spending in the U.S. drove demand for the greenback higher. The global commodity complex weakened in response, as prices on a wide swath of commodities eased lower. After climbing three of the last four weeks, the CRB Index retreated four of five days last week, led by Friday’s 542-point sell-off, the steepest in a month.

Attention in the U.S. is currently focused on Tuesday's March 31 planting intention report. There appear to be differences of opinion as to the anticipated reduction in cotton acreage. In some trade groups, U.S. acreage is forecast to fall to as low as 8.2 million acres (the U.S. planted 9.47 million acres last year) -- a few predictions are even lower. Several grain groups have the decline only down to 9.0 million, while we anticipate a number closer to 8.4 million acres. At the center of the debate is the profitability of corn and soybeans. Breakeven costs for many growers in soybeans are near $8.00 per bushel: while at various times, farmers have been able to lock in $1-2 per bushel profit margins. Planting of the 2009 cotton crop has begun in Arizona and South Texas. Beneficial drenching rains fell for several days this past week across virtually the entire Delta and Southeast, with showers possible in parts of West Texas over the next few days.

One factor that has been limiting the ability of May ICE futures to break through the 45-46 area this past week has been the volume of hedging from the U.S. trade as they redeemed CCC loan cotton and hedged it. This was confirmed in today's weekly CCC loan redemption data showing a total of 1,852,680 running bales were redeemed from the CCC loan last week, leaving loan stocks at 4.875 million running bales of upland cotton, the lowest level in months.

Technicals deteriorated further as the first test of the longer-term moving averages clearly failed and May closed below Thursday's outside range low. This has left the cotton market in a near-term vulnerable position. Overall, the market is now back on the defensive in the short term.

Weekly Commodity Market Recap: Cotton

As sentiment for lower cotton plantings in coming weeks in most key growing areas around the world begins to take root, prices are firming in response. China, the U.S., Uzbekistan, and the African Franc Zone all expect to see less land planted to cotton and presumably fewer bales harvested this fall. Another survey of producers across several provinces in China points to a double-digit decline in plantings. While land planted to cotton may not be off as much as feared just a few weeks ago, a substantial drop in China appears highly likely. In the U.S., conditions across much of Texas and California remain drier than normal, and more rain is needed before planting time, else plantings and yields may be adversely impacted. The initial prospective plantings report from the USDA is due in little over a week, but is expected to show another sizable decline in U.S. acreage, possibly falling to the lowest level in over a quarter century.
More broadly, the rebound in commodity markets and the weakening in the dollar are also supporting cotton prices. The CRB Index last week reached 226.1, its highest point since January. Last week commodities surged the most this year, led by energy and precious metals, on speculation that the Fed’s steps to resuscitate the U.S. economy will spur demand for raw materials as a hedge against inflation. The Fed’s announcement to buy $1 trillion in long-term Treasuries also drove down yields and sank the dollar, helping to support export sales of cotton.
Beyond the boost from these outside influences, ICE cotton futures were able to show independent price strength as new speculative longs were established following an upside breakout after holding a well-defined double bottom first begun in November. Total open interest rose to 133,390 contracts toward the end of last week, the highest level in 4 months. Cotton’s attraction is linked to the heavy discount of the forwards and a rather impressive chart pattern. Prices finished the week just above 44 cents per pound, the highest point in six weeks. Expect faint flickers of an improvement in demand in several markets to be tested in coming weeks from the extinguishing influence of higher prices.

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Weekly Commodity Market Recap: Cotton

The week provided plenty of news to drive the market, but with offsetting bullish and bearish fundamentals, prices remain constrained within a 400-point trading range established over the last month. China’s AQSIQ held firm on its March 15 deadline to implement a registration scheme for foreign cotton suppliers. This plan has been challenged by cotton exporters around the world, particularly in Australia, Brazil, and the U.S., the largest suppliers to China. Accordingly, while 104 firms around the globe have been approved for this list, key exporters in these countries remain conspicuously absent.
Weekly reports from the CFTC added a dose of bearishness to the market. The cotton on call report showed the volume of unfixed call sales—futures needing to be bought—fell to its lowest level in almost seven years. Similarly, the Commitments of Traders report showed index funds’ net long positions retreating to fewer than 60,000 for the first time in over three years.
The potential for a plateauing dollar could turn into a positive impact for cotton and other commodities. After reaching a near-term high earlier this month, the topping pattern now prevailing in the U.S. Dollar Index is supporting a broad mix of commodities. Already, the last two weeks of U.S. exports have been among the strongest in months, prompting the USDA to raise its export forecast 500,000 bales from February to 12.0 million.
The middle of the week saw the release of the latest WASDE supply/demand report from the USDA. The report was mixed, with current-year fundamentals expected to tighten in the U.S., but loosen in China, India, and around the world. A 500,000-bale increase in U.S. exports offset a 150,000-bale decline in domestic mill demand. Worldwide, global mill demand forecasts for this year fell for the ninth straight month, down another 1.5 million bales from February’s projections.
Looking to next year, USDA officials presenting at the Ag Outlook Conference provided a first glimpse into new-crop fundamentals. Lower anticipated plantings in the U.S., China, and the world suggest supplies will remain lower than this season, as producers around the globe shift land to other crops seeking higher returns. With the global economy expected to improve in 2010, world mill demand is likely to rise modestly in step, driven by a mild rebound in Chinese use. These forecasts confirm an outlook for tighter markets in 2009/10 in the U.S., China, and worldwide, supporting sentiment for a return to stronger prices longer term. But first, the market must digest the continued erosion of weaker mill use and trade projections this year that is hindering price in the short term.

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