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.