Weekly Commodity Market Recap: Cotton

Even though the trading week was shortened by holidays in the U.S. and China, cotton saw a jump in volatility, with prices swooning almost limit-down during intra-day trade Tuesday, only to bounce limit-up during early trading Friday. On balance, the two days mostly offset one another, with prices easing 14 points from last week to 56.97 cents per pound. Sunny, drier weather across much of the U.S. cotton belt enabled producers to rapidly advance plantings last week, but the season-to-date national pace still remains well behind trend, hinting at the increased potential for yield and quality issues later this autumn. At 61%, the share of crop already planted to cotton jumped 19 percentage points from last week, but is still down 8 points from the five-year average. Arguing further for the bulls, U.S. exports in the latest week remained above the pace necessary to reach the latest USDA forecast, reinforcing our belief that this forecast is too low. At 296,000 bales, shipments again easily outpaced the 207,000-bale pace necessary to reach the 12.5 million-bale target from the government. We look for exports in 2008/09 to exceed 13.0 million, putting tighter pressure in coming weeks on the domestic stocks-to-use ratio. Further cementing the bulls’ argument, the U.S. Dollar Index breached its December 2008 low, breaking technical support levels and driving a host of commodity prices higher.
The bears point to the acceleration in the auctions of reserve stocks in China, weak U.S. mill demand, and scattered showers across much of Texas to temper price gains. China said last month it will sell just over 1.5 million tons of cotton from its state reserves in a bid to ease tight supplies. Since May 22, Chinese textile mills in China have bought 65% of the 58,442 tons released for sale so far. While a far cry from the total reserve levels, volume jumped in the latest day of trading after the government eased the procurement price as discussed here. Also last week, the U.S. Census Bureau announced that annualized April mill use fell to less than 3.1 million bales, the lowest April ever recorded. This is less than the 3.6 million currently anticipated by the USDA for 2008/09, and may drive the projection lower in coming months. Finally, wet weather returned to much of Texas in recent days, benefiting the young crop. While Rio Grande cotton remains under exceptional drought conditions, the welcome rains alleviated dryness across much of the Rolling Plains and West Texas, hinting at improved yield prospects in the largest cotton-producing state.