Weekly Commodity Market Recap: Cotton

New York cotton futures finished their third straight week of declines on cues from outside markets, falling to the lowest weekly close in more than two months. This marked the third consecutive week of lower closes, the longest such streak since a four-week losing stretch that ended March 6.

Nearby prices closed Friday at 56.30 cents per pound, hampered by weaker signals from traders and declines in outside markets. First, the weekly Cotton on Call position report from the CFTC showed a decline in total unfixed call sales to 44,188. This came primarily from the most-traded December contract, where unfixed call sales retreated 533 contracts from the previous week’s record high to 17,253.



















Also, the latest spec/hedge report from ICE Futures U.S. added to the glum mood over the market last week. The spec/hedge report for the week ending August 24th showed speculators reduced their net long position from 12.2% to 8.7%. Overall spec longs likely sold their positions to the trade, as spec longs reduced their position by 6,057 contracts to 49,476. Finally, the latest net futures position from the CFTC’s Commitments of Traders report dipped to 24,004 contracts Friday, its lowest weekly close in almost two months. All three gauges substantiate the decline in futures in the latest week.



Outside markets also weighed on cotton prices in recent days. Wheat and corn prices are flirting with multi-month lows, while synthetic fiber prices in China are swooning from near-term highs set a month ago. Nearby wheat futures fell to $4.60 per bushel last week, down each of the last three weeks in step with lower cotton prices. Corn prices fell for the seventh time in the last nine weeks, down to $3.21 per bushel. Even prices of synthetic fiber feedstocks eased in the last week, dampening prices for purified terephthalic acid (PTA) on China’s Zhengzhou Commodities Exchange. Economically speaking, PTA is a substitute good for cotton, meaning fluctuations in prices here tend to mirror changes in cotton prices. As a derivative of oil and an ingredient in polyester production, lower PTA prices point to lower cotton prices. PTA futures dipped for the second straight time last week, down to 7,684 yuan per metric ton (51.0 cents per pound). Despite the lower close in cotton prices this week, we are still friendly to this market, and believe we are near the bottom of our range.

Weekly Commodity Market Recap: Cotton

Last week’s trading saw U.S. futures end the week down 132 points from the week before, even as most of the week’s news took a modestly more bullish slant, suggesting shorter term there may be more downside potential in price. Last Monday’s open jumped 142 from the previous close, as Typhoon Morakot roared ashore in Taiwan and mainland China’s Fujian province. While the storm brought drenching rains to cotton in Zhejiang, Anhui, and Jiangsu, the impact likely may be more fully felt on shipping delays and slower retail sales growth. Midweek trading continued to see lackluster volume—an issue noted over the last two months—with futures inching higher. With few consequential changes from its July forecast, Wednesday’s August supply/demand report from the USDA was a non-event, with the market effectively shrugging off the report. Friday’s limit-down sell-off in cotton helped confirm our suspicions last week here that the market appeared mildly overbought. Nearby cotton prices fell to 59.21 cents, its lowest close in eight days.

The market continues to be influenced by thin summertime trading, making for more volatile conditions. In coming days, the impact from the first three named Atlantic and Gulf storms may weigh on prices. Already, Claudette made landfall Sunday night over the Florida panhandle and is expected to cut a quick path across to the Missouri bootheel by Tuesday afternoon. After coming ashore, this weak storm weakened more, as is currently classified as a tropical depression over southern Alabama. A stronger Ana may follow a similar path, while it is not expected to come ashore in the Southeast until late in the week. Bill has the most potential to reach hurricane strength, but several models suggest this storm may veer northward and remain well away from cotton in the southeast U.S.

Elsewhere, South Texas remains in the grip of a record drought, while West Texas may see a bumper crop. The 2009 Texas Upland cotton crop is expected to total 5.4 million bales, 21% more than in 2008. Yield is expected to average 701 pounds per acre, compared with 657 pounds last year. Acreage expected for harvest is estimated at 3.7 million acres, up 14% from 2008.

While we are not writing off the Indian crop, the monsoon remains unimpressive across much of the cotton area in India. The below-normal rainfall so far does not bode well for the crop. However, models do indicate that showers may increase over the next several days in some of the drier northern areas. Still, rainfall deficits are expected to linger and negatively impact yields in the world’s largest cotton area.

Weekly Commodity Market Recap: Cotton

After retreating the previous week in response to overbought technical and fundamental signals, last week’s market posted an impressive rebound, but darkening fundamental clouds this week suggest prices may ease lower in coming days. The futures market jumped 260 points last week, driven higher by a near limit-up move Monday. This jump came in concert with a strong surge from most other key commodities, as the dollar fell to its weakest point this year. Prices Tuesday and Wednesday remained range-bound, only to see a re-strengthening dollar Thursday push futures lower. Spec buying Friday helped the market reach just below 62 cents per pound, the highest level in half a month, but profit taking Friday eased gains, with the week closing at 60.53, just below Tuesday’s close.

Looking to the new week, all eyes will turn to the forthcoming USDA supply and demand report due to be released Wednesday. We anticipate the USDA will turn more bearish in its next report, with looser fundamentals expected in the U.S. and worldwide. We look for the report to show a modest increase in the anticipated size of the U.S. harvest, as steady improvements in the condition of the crop across the cotton belt over the last month boost the outlook. Evidence shows half the U.S. crop is in good or excellent condition, up each of the last four weeks. After averaging 13.25 million bales each of the last three months, we look for the USDA to raise the production forecast to 13.6 million, as higher anticipated yields in the Midsouth and Southeast offset crop damage from exceptional drought conditions in South Texas.
We remain pessimistic toward the prospects for U.S. mill use in 2009/10. While economic activity is likely to rebound in the new marketing year, we are not confident that mill demand for cotton will remain essentially unchanged from the 3.55 million bales recorded this year. We look for continued consolidation in the industry—albeit at a slower pace—and expect the August forecast to ease modestly to 3.45 million bales.

Foreign demand for U.S. cotton is likely to ebb in the new marketing year, suggesting lower U.S. exports. Already, the combined volume of carryover sales and sales for 2009/10 is less than at this point in each of the last several marketing years, suggesting exports next season may be lower. We expect U.S. cotton to maintain its one-third share of global exports, implying shipments may stay roughly flat from July at 10.2 million bales in August. On balance, higher production and modestly lower demand for U.S. cotton is likely to boost anticipated ending stocks. We look for the USDA to revise its August projection for U.S. ending stocks for 2009/10 to 5.9 million bales. Even so, this would still remain the lowest in five years.

Worldwide, changes in global fundamentals are likely to mirror the expected changes in the U.S. We expect the USDA to modestly increase world cotton production, as improved prospects in the U.S. offset a dimming outlook in India. A lackluster monsoon here continues to sprinkle insufficient rains on most of the country, hindering crop development in a country that plants more land to cotton than any other. We look for the USDA’s August forecast to increase to just over 106.0 million bales.

Mill demand for cotton remains lacking in most of the world. After reducing its forecast in June and July, we believe the USDA forecast still remains overstated. While consumption may not dip as low as in 2008/09, we look for slower growth in 2009/10 than currently projected and expect the August forecast to ease for the third straight month, dipping another 600,000 bales to 112.0 million. Similar to the U.S., higher supply and lower demand forecasts imply higher ending stocks. At 58.5 million bales, our expectation would mark the third straight increase from the USDA and the third straight month of gradually looser fundamentals in the market.
The big news last week was the announcement that two of the world’s largest cotton merchants planned to merge, creating a cotton trading behemoth that would sell one in ten bales grown around the world. Thursday Allenberg Cotton Company confirmed rumors that it planned to acquire Dunavant Enterprises Inc. The deal could align two of the world’s leading cotton merchants into a behemoth organization responsible for marketing one in ten bales grown around the world. Cordova, Tennessee-based Allenberg, the largest in terms of both revenue and volume, oversees shipments of more than seven million bales U.S. and foreign growths, with revenues of roughly $2.0 billion. Privately-owned Dunavant handled six million bales last year, with revenues at roughly $1.5 billion. Together, the combined organization could market over thirteen million bales, or more than one-tenth of the global cotton crop.