Weekly Commodity Market Recap: Cotton

After strengthening for four straight weeks, cotton prices retreated last week, as bearish fundamentals in the U.S. and abroad chased off the bulls that had dominated the market over the last month. Domestically, crop conditions generally tended to improve last week, as key cotton areas of the Southern U.S. largely experienced timely rains last week. Globally, India’s delayed monsoon finally kicked into gear, just as the monsoon season reached its typical seasonal peak. The past several days marked the first week this year in which monsoon rains exceeded the norm, brightening the prospects for late-planted cotton in the country that plants more land to cotton than any other. Similarly in China, timely rainfall and normal hot weather in Anhui and Hebei is benefitting cotton in both provinces, hinting at improved yield prospects in the world’s largest cotton-producing country.

The demand side also saw the bears dominating the news in the last week. U.S. mill demand for cotton continued its long-term slide, with annualized consumption in June falling 26.3% from a year ago to 3.22 million bales, down for the 46th time in the last four years. June cotton fabric exports from both China and Pakistan also shrank, extending declines in both markets and countering tentative ‘green shoots’ of improving demand in yarn output in both markets. Further downstream, the week brought reports of a record collapse in Peruvian apparel exports and the biggest drop in years in clothing shipments from Sri Lanka. In turn, these markets responded to sinking import demand reported in key retail markets last week, including the U.S. and Canada.

For the week, Nearby cotton traded lower three of five days, shedding 471 points on the week. Technical action suggests that the market may have established a near-term top, with cotton completing a weekly outside-range reversal to the downside late in the week. Unfixed on-call sales in December cotton expanded 1,018 lots to 16,859 during the week ended last Friday based on revised data from the prior week, while unfixed call purchases increased 338 lots to 8,876, according to the latest Commodity Futures Trading Commission data. The ratio of potential buying to potential selling edged fractionally higher to about 1.9:1 and the net call difference of 7,983 lots comprised a marginally higher 7.6 percent of December's rising open interest.

Looking ahead to the coming week, the calendar is relatively light on reports likely to directly impact the cotton market. As we approach the end of the marketing year, exports remain underestimated, something we have long argued. But improved weather developments this week could easily counter any bullish sentiment from modestly higher revisions to exports. The dollar is likely to have the biggest impact on the market in coming days, as the government will flood the Treasury market with a record amount of new debt this week, topping $200 billion. Already, the dollar is near its lowest level this year on speculation the global economy is shaking off the worst recession in decades. A weaker dollar could drive commodities—including cotton—higher, reversing last week’s swoon, or a rebound in the greenback could extend the dip in cotton prices, fortifying the near-term resistance set at 63 cents per pound last week.

Weekly Commodity Market Recap: Cotton

Cotton prices edged higher for the fourth straight week, finishing Friday at 62.10 cents per pound, the highest weekly close since September. Signs from both the fundamental side and trading side of the market support the recent firming in price. While cotton textile production in India, Turkey, and the U.S. remains lackluster, signals in China continue to point to a rebound in downstream demand for cotton. Total yarn production rose to a record 2.2 million metric tons in June, the 22nd year-over-year gain in the last two years. Further downstream, cotton fabric production rose to 2.9 billion square meters in June, also a record. On the supply side, India’s delayed monsoon rains advanced in the latest week, but may be too late to justify such a high level of plantings forecasted by the USDA. Some analysts—including FCStone—believe Indian production this year will fall well short of the 25 million-bale forecast from the USDA. In the U.S., exceptional drought conditions intensified across southeastern Texas in the latest week, withering crop prospects in the Coastal Bend region, something we have long cautioned about.

Spec and fund buying are also suspected as a big influence behind the recent advance in futures prices. Since reaching a new-term low of 105,969 contracts in open interest in late June, open interest in cotton futures climbed more than 20,000 contracts since then, up 18.9%. While open interest of 126,038 contracts pales in comparison to the 302,000+ contracts of open interest in early March 2008, an increase of nearly 20% in open interest in just sixteen sessions indicates that spec and fund money is slowly but surely returning to the cotton market. The recent run-up in U.S. futures prices mirrors the gains witnessed in China. Nearby cotton on the Zhengzhou Commodity Exchange closed the week at the equivalent of more than 90 cents per pound, the highest level in months. The bulls’ argument also points to a falling dollar, coupled with stronger crude oil, gold, and grains prices.

Even so, all these bulls gathering on the bandwagon can tip the market into a correction. While the technicals are not screaming for a correction yet, the USDA threw cold water on the market recently by boosting anticipated global ending stocks by 1.4 million bales. And prospects for a rebound in global mill demand remain based on the outlook for an improvement in the global economy, something we believe will be sluggish in coming, with risks weighted to the downside.

Weekly Commodity Market Recap: Cotton

Weekly nearby cotton prices on the ICE Futures U.S. closed Friday at their highest levels in ten months, shrugging off the effects from a mildly bearish—but expected—USDA supply/demand report, focusing instead on mounting concerns over delays in the Indian monsoon, sweltering 100+ degree weather across much of Texas, and persistent rumors of new forthcoming import quotas in China. This marked the third straight week of higher closes in futures prices, with the week finishing at 60.39 cents per pound. After closing lower the first three days of the week, Nearby prices roared ahead Thursday and Friday, up a combined 339 points. Most-traded December pierced a six-week high of 62 cents Friday and is poised to challenge resistance below 63 cents this week, the highest point in ten months.

Optimism earlier this season for record yield and production in India is fading with each passing day, as concern grows over a lackluster monsoon season. After its earlier-than-normal arrival, progress of the monsoon across the country has been slower than trend, with most parts of central, north, and northwestern India yet to receive sizable rains. Over the last two months, daily rainfall has only surpassed the average daily rainfall totals nine days, with totals not reaching half of the normal amounts most days. The window of opportunity for planting the Indian cotton crop will close this week, squelching early optimism for hearty yields and adding to the bulls’ fundamental argument for tighter global stocks.

In the western hemisphere, weather issues also are adding to concern about the size of the crop. Cotton areas across most of southeast Texas continue to experience exceptional drought, and no measurable rain is forecast for the coming week. For the ensuing five days (July 14 – 18, 2009), below-normal precipitation is again expected across Texas, hinting at prospects for dismal yields in the area. Without replenishing rains soon, it is doubtful that there will be sufficient water to finish the cotton crop in the Coastal Bend region this season, reinforcing the bullish sentiment.

Finally, demand-side issues are reinforcing the bulls’ position. Persistent rumors continue to circulate of an imminent release of additional import quotas in China. These rumors have loomed over the market for several weeks, seeming to gain additional traction over time. Now, some Chinese mills are confirming that they received additional import quotas. With the new quota estimated to be about 400,000 metric tons (1.8 million 480-lb. bales), this could provide a boost to early-season U.S. exports in coming weeks.

This outlook for a weaker Indian monsoon, higher temperatures in southeast Texas, and new Chinese import quotas enabled the market to rise again in the latest week, effectively ignoring bearish sentiment from the USDA’s latest WASDE report.

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

For companies thinking cotton is just cotton, the market has some surprises in store. Although the overall quality of cotton globally may be increasing, how the improvement is occurring remains surprising--long staple cotton has expanded to become the dominant type of quality cotton produced today, while at the same time these gains have translated into a decline in Pima and other extra-long staple varieties, and the traditional lower end of the market, generic upland cotton. So what had been the middle of the market has now become more important than ever in understanding the global cotton business.

Indeed, what are the ramifications of such changes? Will cotton become cheaper or more expensive? What about supply versus demand? Will there be shortages or new market opportunities?

To help answer these and other questions, FCStone Fibers & Textiles announces a new multi-client study entitled "The Future of High Quality and Branded Cotton".

With particular focus on China, India, the U.S. and Egypt, this study will examine global supply and demand trends for the major varieties of cotton, the attitudes of buyers and sellers of cotton internationally and the implications these trends and attitudes will have on merchants, mills, and retailers throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click here to download a copy of the study prospectus. If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

Weekly Commodity Recap: Cotton

After gapping higher the previous week, the cotton market rose further during the holiday-shortened week, closing at its highest weekly close in two months. Little major fundamental bullish news accounted for the gain, aside from Texas weather concerns, increased speculation about new forthcoming Chinese import quotas, and a strong weekly export report.

The week began quietly, with many traders either on vacation or on the sidelines in anticipation of the pending USDA Prospective Plantings report. Reports from India indicated the late monsoon had finally begun in earnest. Monday saw rainfall amounts surpass the normal daily mean rainfall for the first time in a month. While the cumulative progress of this season’s monsoon remains well behind trend, the intensification in precipitation was a welcome sign across the country. Nearby cotton prices in the U.S. closed up a modest 11 points on the day.

Tuesday, the cotton plantings report from the USDA was within trade estimates, with total cotton acreage estimated at 9.05 million acres, down 4% from last year. While this level is mildly higher than forecasted in the prospective plantings report issued in March, the number surprised few. Nearby futures traded in a 300-point range on the day after the release, but settled up only 63 points from the day before.

Wednesday saw a dramatic limit-up move, but appeared based on little fundamental news. The strong move up came on increased volume, and all major moving averages were violated, as was resistance at 59.71. Aside from developing crop progress and condition concerns in Texas, there seemed little to drive the market higher. At the start of last week, less than one-third of total cotton acres across the cotton belt were at or beyond the squaring stage, the slowest pace of progress for this week in more than a quarter century of record keeping. In particular, the Texas crop is hindering the advancement of squaring across the Belt. While the development of the crop remains behind trend, the condition of this year’s cotton crop is eroding over recent weeks and is lagging this point last year. As of last week, only 42% of the crop was estimated to be in good or excellent condition, versus 44% a week ago and 45% at this point last year. Again, Texas is to blame, dragging down the national average. Just 28% in this state is listed in good or excellent shape, the fourth-worst share for this week in over twenty-five years. Without acceleration in the progress of the Texas crop or improvement in the condition of the crop, it may be difficult for the outlook for this season’s crop to improve markedly in coming weeks. With little other major fundamental news to drive the market, nearby prices closed up 300 points at 58.63 cents per pound, the highest close in a month.

Thursday, net U.S. export sales came in at the top of the range of reported expectations and shipments easily surpassed the weekly average needed to achieve USDA's 2008-09 forecast, echoing our outlook over the last few months that the export forecast remains too low. While China remained the largest destination for shipments last week, volume to Mexico jumped to 46,494 bales, the highest in more than a year. Cotton prices closed the day and week at 59 cents, up 37 points from Wednesday and up 411 points from the week before.

After closing higher every day last week, cotton reached its highest weekly close in six weeks, but still does not appear technically overbought. Despite the recent volatility, we continue to see a market confined to a broad range between 55 and 63 cents. Summertime trading is always accompanied by weather scares and this July should be no exception. Whether late monsoons in India, dryness on the North China Plain, spotty rains in West Texas or early hurricanes in the southeast U.S., there is always weather to keep us company—and on edge—during July and August. The fundamentals of supply and demand appear tighter going forward, just not yet.