Weekly Commodity Market Recap: Cotton

After climbing five of the last seven weeks to the highest level in fourteen months, nearby cotton prices stayed range-bound last week within the limits set last Monday as traders wrestled with an outlook for both lower supply and demand. After dropping 174 points last Monday from the prior week’s close, futures prices spent the week within a 250-point range as harvest concerns in several markets weighed against news of lower demand for U.S. cotton. Too much rain in Mid-South states here continues to plague production prospects in the region, delaying harvesting to the latest in history. With each passing day, the outlook for cotton yield and quality are eroding in the region. While low temperatures have remained above freezing in most of the south, prospects for the crop will dim rapidly once wintry conditions set in.

Similarly, inclement harvest weather in China is calling into question earlier optimistic forecasts for the crop size. In China’s Xinjiang province, freezing temperatures and the first snowfall of the season here are accelerating picking before harsher conditions set in. Also recently the China Cotton Association drastically reduced its anticipated harvest size by 2.5 million bales from the previous month’s forecast to 30.8 million bales, with Xinjiang production down 14-15% from last year, leading the decline.

Demand issues also weighed on the market, helping temper the streak of bullishness over recent weeks. U.S. mill consumption in September fell to a record-low 2.9 million annualized bales here, well below the latest USDA forecast for 2009/10 of 3.4 million bales. And weekly export sales and shipments fell to a marketing year low for the week ending October 15, suggesting cumulative shipments in 2009/10 remain behind the pace necessary to reach the latest forecast.

News of lower supply and demand last week worked to offset one another, leaving prices to trade within Monday’s range all week. By Friday, futures closed 83 points lower from the week before at 67.38 cents per pound. The weekly Spec/Hedge report showed that the spec long position grew to 18.5%, up 4.1 percentage points from the previous week. As the spec long position grows, so has open interest in cotton futures. By the close of business Thursday, open interest had risen to 180,635 contracts, strongly suggesting money is flowing into the cotton market.

Looking ahead, data on home sales, consumer spending, and a first look at third-quarter GDP will set the tone for economic releases for the week. After seeing the dollar plunge to a fourteen-month low last week, these data coupled with new retail sales data and an interest rate decision in Japan are sure to sway the greenback in coming days, with most commodities—including cotton—sure to respond in kind.

Weekly Commodity Market Recap: Cotton

Buoyed by supply concerns and bullish outside influences, cotton prices extended their impressive streak of gains last week, rising to the highest levels in more than fourteen months. December futures rose for the eighth time in ten sessions Friday, up more than 750 points over the last two weeks. At 68.21 cents per pound, the December contract finished the week up for the fifth time in the last seven weeks as the bulls clearly dominated the news.

Concerns continue to mount over harvest prospects in several markets. In particular, Delta cotton fields in the U.S. remain soggy from persistent rains over the last month, hindering and delaying harvesting. Evidence here shows near-record rains fell over recent weeks in the area, and are likely to damage yield and quality to cotton from the region. Also, after suffering through its third summer of drought, recent downpours in California discussed here have come at a most unwelcome time, with virtually all the cotton bolls open, but hardly 6% of the crop harvested. Adding to the dismal outlook, Hurricane Rick in the eastern Pacific here may complicate harvests in Texas closer to the weekend, further compromising the U.S. crop.

Too much rainfall also remains a concern in China, where futures prices are flirting with their highest levels in almost a year and a half. Several eastern provinces report delays in harvesting and damage to quality from untimely rains, driving local prices higher. In fact, even with prices continuing to firm, evidence here shows many producers remain reluctant to sell, expecting prices to rise further. Recently-revised forecasts promulgated within the country here point to lower production and higher demand, supporting this sentiment, boosting domestic prices.

Even away from the fundamentals, other signs point to continued strengthening in price. The dollar continues to sink lower, plunging to its lowest weekly close in fourteen months, helping boost a wide range of commodity prices. Cheerful words from the Fed and the Treasury are doing little to turn investor sentiment back to the dollar, particularly after last week’s news of a record $1.4 trillion deficit in the U.S. Also, money flow into cotton has been impressive and open interest is exploding. New speculative money matched up against new commercial hedging has amplified the expansion of open interest. And unfixed call sales reported here in last week’s Cotton on Call report rose to a thirteen-month high, supporting continued gains in price.

This string of higher closes is reminiscent of the period two years ago when futures began their march to the highest levels in years, culminating in the March 2008 spike. While this is not the same market—with the same outside influences and hysteria driving prices higher—the trend remains firmly with the bulls, even as the bears point to the need for a correction. For now the market has some strong upward momentum.

Weekly Commodity Market Recap: Cotton

After retreating the two previous weeks, cotton prices firmed last week, supported by external and internal factors that were friendly to the market. Nearby cotton prices in the U.S. rose 236 points on the week to finish at 63.02 cents per pound, the highest close in three weeks. Outside influences boosting cotton futures included rebounding stock and commodity prices and a weaker dollar, while the internal factors of tighter supply/demand estimates from the USDA and higher unfixed call sales helped reverse last week’s slide.

Exogenous factors continue to have a large influence over the cotton market. Cotton prices responded to an improving stock market, as the Dow Jones Industrial Average gained 372 points on the week to flirt with its highest level in a year. Higher prices for key commodities also helped boost cotton futures. Corn, soybean, and wheat all saw solid gains on the week, as prices in the broader commodity complex rose in response to a weaker dollar. The CRB Index of nineteen raw materials saw its biggest weekly jump since the spring, finishing at its highest weekly close in two months. Speaking of the dollar, the greenback sagged further last week on speculation the Federal Reserve will trail other central banks in raising interest rates, making the currency less attractive. A rising cacophony of voices around the world questioning the reserve status of the dollar doesn’t help bolster sentiment for the currency, either.

Improving fundamentals more directly tied to the cotton markets also pointed to firmer prices last week. As we expected here, a report from the USDA anticipating smaller ending stocks domestically and worldwide this marketing year helped buoy prices. Here the USDA lowered the projected harvest size in the U.S. by 440,000 bales from last month, with most of the decline coming from Texas. This leaves us believing production may decline further in coming months, as many analysts are looking for lower yields and quality from Mid-South states. Worldwide, production forecasts here sank 1.3 million bales from last month, with the Chinese harvest withering by one million bales. Additionally, the latest volume of “on call’ positions reported by merchants here jumped to the highest level in more than a year, carrying cotton prices higher. At 50,423 contracts, unfixed call sales outnumber unfixed call purchases by more than three-to-one, the widest gap in more than a year.

Looking ahead, we are mildly bullish in the short term. We continue to feel the damage to the Mid-South crop is not fully reflected in the U.S. production outlook. Further, there is more adverse weather in the forecast, which doesn’t make physical traders necessarily bullish, rather more hesitant to be very bearish. Speculators are just plain bullish and appear ready to exact continued pressure on the unfixed spinners. We look for December to have room to strengthen further in coming weeks, likely beyond near-term resistance levels.