Weekly Commodity Market Recap: Cotton

The market is set to digest a slew of data this week that could help set the direction and pace for what has become a listless cotton market. Industrial production and retail trade reports from several key markets around the world may shed insight into the likelihood of improved demand for textiles and apparel around the globe.
In one of the most anticipated releases this week, new WASDE data Wednesday may set the tone for a gradual improvement in fundamentals, or could keep the cotton market mired in burdensome oversupply. We look for the report to boost the old-crop U.S. export forecast by a few hundred thousand bales, reducing carryover stocks and tightening the domestic stocks-to-use ratio. Looking to the new marketing year, we don’t expect much change in U.S. production, as an abundance of moisture in the Southeast and Mid-South may offset dry conditions in South Texas and California’s San Joaquin Valley.
On the demand side, we believe at 3.5 million bales, the U.S. mill demand forecast is optimistic. Consumption has recently averaged closer to 3.1 million bales, and we see little reason to expect a 10-15% improvement in 2009/10. We look for a rebound in the global economy in 2009/10 to drive a jump in global cotton mill demand and a global trade. Accordingly, as the world's largest exporter, we expect an increase in global cotton trade to prompt an increase in U.S. cotton exports in response. This increase from the USDA is likely to come gradually over the next several months, but we look for the higher revisions to start soon. Little anticipated change in supply from the May WASDE report, coupled with a net increase in demand is likely to reduce U.S. ending stocks to the lowest level in six years.
Cotton prices eased again last week, down three of the last four weeks, after breaking from their March-to-May surge. Nearby prices dipped 186 points, finishing the week at 57.11 cents per pound. Futures prices declined on the week as strength in the dollar continued to have a strong influence on cotton. Just as cotton is mostly higher since March, the dollar is mostly lower over the period. But last week saw a sizable rebound in the dollar, boosted by positive data in Friday’s unemployment report. With few unanticipated changes in the fundamentals yet to materialize from the forthcoming cotton marketing year, we look for cotton to take more direction from the influences of outside markets. We remain mildly bullish longer term, but expect choppy conditions to persist into the summer.