Weekly Commodity Market Recap: Cotton

ICE cotton futures continue to march higher, rising for the sixth time in the last seven weeks, but more cracks are appearing in this recent bull run. The Nearby contract finished the week at 52.70 cents per pound, surpassing January’s near-term high and reaching the highest close in six months, buoyed by factors internal and external to the cotton market. A weaker U.S. dollar and still-massive Chinese and Indian stocks that remain withheld from the market provide a firm foundation to price. Also, the CFTC recently reported that unfixed call sales of cotton rose for the sixth straight week—tracking the rebound in futures—and reached their highest level in two and a half months.

But cracks in the façade are beginning to show, suggesting a correction may be warranted. Even as the first green shoots of improving demand are beginning to appear in pockets around the globe, one must remember world cotton mill demand and trade remain in the worst contraction on record. China is showing more signs of improved offtake, but Indian cotton textile output collapsed in February. Pakistani and Turkish mills remain in dire straits, while one of the largest yarn mills in the U.S. closed for good earlier this month. Technically, nearby cotton prices pierced 70 on the RSI for the first time in ten months, adding another overbought signal. While other ag futures—particularly on corn and soybean—are up in concert from their near-term lows set in early March, cotton has climbed faster, supporting the notion of a pullback. We continue to expect the global textile economy to improve in the new marketing year, supporting an outlook for modestly higher prices, but look for a nearer-term correction in the market before journeying higher.

Weekly Commodity Market Recap: Cotton

Since reaching its year-to-date low in early March, cotton continues on its tear, with prices rising for the fifth time in the last six weeks. At 49.94 cents per pound, Friday’s close on ICE Futures U.S. is the highest in over two months and reflects a 24% rebound from its March low. An improving fundamental outlook is helping to support prices. While global fiber and textile markets still remain weak, signs of life are beginning to emerge, suggesting brighter days ahead. Chinese mills boosted yarn production in March at a double-digit pace to the second-highest level ever recorded. Similarly, output of manmade fiber in this latest month inched to a new high, driven by renewed demand. In the U.S., CCC cotton loan stocks extended their rapid contraction for a fifth straight week, while Chinese reserve procurement stocks still remain withheld from the market as prices have risen. At the same time, plantings in a handful of countries may fail to reach early projections, implying likely lower stocks in the forthcoming marketing year and evidence for higher prices globally.

While we remain bullish for price in the long term, we are hesitant in the near term, owing to prospects for a shorter-term pullback. The USDA still maintains what many market observers—including us—have maintained for some time is an unrealistic forecast for Chinese mill demand this marketing year. Additionally, new U.S. cotton usage data for February suggest the domestic forecast remains overstated. And several technical indicators for the short-, medium-, and long-term increasingly are showing ‘buy’ signals. While we pay close heed to the technicals, the contrarian argument suggests if everyone is long, the time for a correction may be rapidly approaching before the market continues higher.

Weekly Commodity Market Recap: Cotton

The latest week provided the first hints of evidence of a market that is seeing the first flickers of improved demand that could point to sustained strengthening in prices well into 2009/10. Last week brought the first peek at the USDA’s prospective plantings report for the 2009/10 crop. The report pegged U.S. cotton acreage sliding 7% from a year ago to 8.8 million acres, the lowest in more than a quarter century. But the forecast actually fell in the middle to higher-end of the range anticipated by industry analysts, and was largely viewed as neutral to the market. Assuming average abandonment and yield in this coming season, the crop size may be little different from the 13.0 million bales just harvested this past fall.
The market also awaits the latest USDA numbers due to be released this week. While April’s figures typically have less of an impact on the market than preceding months, they cannot be disregarded. We look for the supply side to remain little changed from March, while domestic demand is likely to see a mild increase, owing to a higher export forecast. On balance, U.S. ending stocks may shrink 150,000 bales owing to higher demand. Globally, the USDA’s production forecasts have dropped seven of the last nine months, shedding almost eight million bales from its initial projections in June. We expect another decline—albeit a smaller one—owing to adjustments from Asian and Southern Hemisphere producers. We also expect to see continued contraction on the demand side, perhaps slipping a quarter million bales to 110.8 million. Mill demand forecasts have declined each of the last nine months, collapsing a jaw-dropping 16 million bales. While we are beginning to see signs of bottoming out in usage patterns in different countries, we expect to see further contraction in several markets in coming months. On balance, lower global supply and demand forecasts could offset one another, meaning little net change in ending stocks from the March forecast of 62.5 million bales.
Despite a rather neutral estimate of U.S. plantings, New York futures subsequently showed considerable strength on the week, influenced both by gains in other commodities and by tentative signs of a bottoming in demand prospects. One development currently playing a role in the behavior of global prices is the rally in domestic cotton prices that is occurring in three of the largest producing and consuming markets—China, India and Pakistan. Chinese domestic prices soared to a five-month high in the latest week. The driver in prices is a shortage of high grades throughout East China. In Pakistan and India, local prices are also firming as the available supply of high grades tightens and yarn inquiries—especially from China—perk up. Futures prices are up for the third week in the last month, with U.S. Nearby prices closing last week at 47.6 cents, the highest level in almost two months. While we remain longer-term bullish, the rapid ascent in price coupled with several technical indicators point to overbought conditions and suggest the need for a consolidation before the market climbs higher.

For more analysis on the global fiber and textile supply chain, please visit our website at www.globecotnews.com.