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.