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.