Weekly Commodity Market Recap: Cotton

Following the correction in prices witnessed two weeks ago, last week the market entered a consolidation pattern as big, offsetting bullish and bearish factors grappled for dominance. Following weeks of speculation, China began to release its ample supplies of reserve stocks to the market. This 1.5 million-ton move is likely to limit any new import quotas in coming months, while the local market digests this extra cotton. While the announced price is only modestly less than futures prices on the Zhengzhou Cotton Exchange, the psychological impact on the market is likely to outweigh the fundamental impact. Also, a record -15.2% annualized plunge in Japanese GDP here dimmed prospects for a quick rebound in clothing demand in the world’s second-largest retail apparel market, casting a bearish pall over the cotton market.
But the bulls were also active last week, led by dollar weakness and robust U.S. cotton shipments. Persistent weakness in the greenback continues to support many commodities, and is providing a solid floor to cotton. The U.S. Dollar Index continued its fall toward the lows set in mid-December. This weakness in the dollar comes as cotton exports soared to a marketing year-to-date high. At 465,000 bales, last week’s volume almost doubled from the week before. It also supports our argument here that the latest USDA forecast may be too low. With less than twelve weeks remaining in the marketing year, exports only need to average 214,000 bales per week to reach the government forecast of 12.5 million bales. FCStone models suggest exports may finish closer to 12.9 million bales, tightening the domestic stocks-to-use ratio this year and supporting an argument for higher prices.
Nearby cotton prices ended the week modestly higher, finishing with a gain of 81 points from the week before, reaching 57.11 cents per pound. While we continue to affirm the longer-term bullish uptrend in cotton prices, last week’s consolidation pattern could point to a nearer-term breather for the market in coming days, particularly if the dollar sees a brief rebound in its gradual slide lower.

Weekly Commodity Market Recap: Cotton

Cotton prices continue to climb on further tentative signs of improving global demand and continued movement away from the dollar, outpacing gains in other softs and ignoring technical signs of being extremely overbought. U.S. Nearby prices finished the week just shy of 60 cents per pound, the highest close in almost eight months. This marks the eighth weekly gain in the last nine weeks, showing a pronounced 20-cent rebound from the November/March double-bottom. After lagging corn and soybean prices during much of 2009, cotton prices have climbed faster than either crop the last few months, and are already up 22% since the start of the year. While the late arrival of this rebound may have a limited impact on plantings across much of the U.S. cotton belt, technical indicators are screaming for a correction. The daily Relative Strength Index stands at 83.0, a few standard deviations away from its long-term mean of 50 and the highest point since cotton futures’ dramatic spike in March 2008. The higher and faster cotton prices escalate, the more in need of a correction the market becomes.

But the gradual erosion in the dollar is having a big impact on wide-ranging strengthening across much of the commodity complex, including cotton. The exit from the greenback began some time ago but has recently escalated in Asia, where new confidence in the regional economies and faith in local currencies are taking hold. As the dollar continues to weaken, the case to move funds back into commodities is again looking strong. Longer-term, we remain quite bearish toward the dollar; if this erosion persists, it is likely to be a major stimulus for the overall commodity complex buoying cotton.

The new week promises much new data on the outlook for cotton in 2009/10. Monday afternoon’s crop progress report is likely to show cotton plantings in the U.S. remain even further behind normal, as a deluge of rains to muddy Delta and Southeast fields delay plantings. The USDA will release its first country-by-country breakdown Tuesday morning, one month earlier than normal. We expect dramatic declines in production in China and the U.S., with gains in India and Australia partially offsetting the losses elsewhere. On the demand side, we project global mill use will rebound somewhat in 2009/10 from this year’s record collapse, as growth prospects improve in many markets around the world. A look at old-crop cotton estimates suggests U.S. demand may rise from the April projections, as higher-revised exports overshadow another likely decline in domestic mill demand. Globally, we expect mill use forecasts for 2008/09 will drop for the eleventh straight month, primarily owing to even lower estimates in China. Later in the week, April estimates of Chinese yarn and fabric output are likely to provide more evidence of a rebound in demand in this market, stoking hopes for improving offtake globally later in 2009.

Weekly Commodity Market Recap: Cotton

Rising in concert with the broad strengthening in commodity markets, cotton prices finished the week at the highest close in seven months, but the presumptive re-strengthening in global textile markets is proving to be tentative, suggesting the robust gains in cotton prices may be premature. Nearby prices in the U.S. settled at 57.20 cents per pound Friday, up seven of the last eight weeks and the highest close since early October. The bulls point to several factors supporting the two-month rally in price. Across the cotton belt, plantings are running behind trend in virtually every state, possibly limiting the number of heat-degree days the crop may receive. Continued dry conditions and inadequate snowpack in California promise to limit irrigation supplies and hinder crop development there, suggesting that state’s cotton crop could only reach a paltry half a million bales this year, the lowest since World War II. The 2009 Central Asian crop has gotten off to one of its worst starts in ten years, with an unusual pattern of wet and rainy conditions plaguing many of the growing areas of Uzbekistan and Turkmenistan, which account for the bulk of the acreage in the area. Also, speculators’ net long position increased again last week, reinforcing the bullish sentiment. Finally, the first signs of an improving economic outlook around the world are beginning to show, implying improved textile offtake in the forthcoming marketing year.

The bears counter with several factors that suggest the market is due for a correction. First, the technical picture remains overbought. Friday’s Relative Strength Index (RSI) for the Nearby reached 78.69, the highest level since March 2008, when prices began an eight-month slide. Since bottoming out in November, cotton prices are up over 40%, easily outpacing the rebound in corn and soybean prices. Fundamentally, cumulative new investment in China’s textile and apparel sector in the first quarter remains less than over the same period last year, suggesting 2009 may see lower output from the world’s largest cotton consumer. Wetter conditions returned to West Texas and most of the northern Cotton Belt in the last week, providing a welcome boost to sub-soil moisture levels before plantings commence in these areas. And longer term, Australian forecasts suggest plantings there could rebound to the highest in years, as reservoir levels continue to improve. We remain modestly bullish longer term, but increasingly look for an overdue short-term correction in the market.