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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