Weekly Commodity Market Recap: Cotton

After drifting lower over the last five weeks, the nearby price for U.S. cotton futures plunged in the latest week, led by a limit-down move last Monday, finishing at the lowest weekly close in over two months. Prices tumbled 454 points on the week to 51.56 cents per pound, weighed down by an eroding fundamental and technical picture.
Several fundamental factors contributed to sink prices in the latest week. West Texas saw an improvement in soil moisture levels from a rain front from Mexico, with the possibility for more in the next week. The dollar rose modestly after favorable comments about its continued status as the world’s reserve currency, dampening enthusiasm for a host of commodities, including cotton. And unfixed call sales in the U.S. retreated to 41,519 contracts, the lowest in a month, helping to drag futures lower. Plus, China’s auction of reserve stocks remains lackluster, suggesting little need to open new import quotas in coming weeks, despite persistent rumors to the contrary. Finally, disappointing reports on retail apparel demand from several markets around the world last week suggested a rebound in global offtake for cotton may be delayed longer than had been expected. These nuggets of news buoyed prospects of higher supply and waning demand, dragging prices lower.
Technically, several short- and medium-term indicators point to a continued bearish picture for cotton, while longer-term indicators hint at a more robust outlook. Certainly, the week has been unusually volatile. Monday’s limit-down move came before two down days and an almost 300-point outside range reversal Thursday, before the market turned defensive again Friday. The drop in futures this week made U.S. cotton the most competitive growth in the world. Also, the weekly spec/hedge report showed speculators continue to reduce their net long position, as it is now 5.3% net long versus 9.5% last week. Not only are speculators reducing their net long position, they are shedding overall open interest, as well. Open interest fell to 112,947 contracts late in the week, the lowest in three and a half years. Whatever the reason, they are losing their appetite for long cotton.
The market likely will remain in limbo before first notice day Wednesday and subject to pre-report positioning until after the June 30 Acreage report from the USDA. There has been talk of acreage being up from the Prospective Plantings estimates in late March, which may be factoring into market weakness. But the delayed crop, combined with east Texas dryness and soggy conditions across much of the northern reaches of the Mid-South are likely to have a detrimental impact on final U.S. production.