Weekly Commodity Market Recap: Cotton

Cotton futures rose last week to finish at the highest close in sixteen months, owing to factors both internal and external to the market. Internally, projected supply and demand trends continue to point to higher prices. In the U.S., damage from the remnants of Tropical Storm Ida is likely to pare back domestic production prospects across much of the Southeast even further. Season-to-date, less than five million bales of cotton have been classed—hardly 70% of this point last year—suggesting production is likely to fall well short of last year’s 12.8 million-bale crop. Elsewhere, India’s Cotton Advisory Board added to the growing cacophony of analysts believing the local crop is likely to be smaller than earlier forecasts. At 23.0 million 480-lb. bales, their latest projection is well below the USDA's 24.25 million-bale November projection. And in China, a first look at the quality of this season’s crop shows length, micronaire, and grade are all poorer than by this point last year, suggesting demand for better-quality foreign growths may pick up in coming months. Also in China, the market shrugged off news of a third round of reserve auctions by the NDRC, with the nearby ZCE cotton contract surging limit-up in its last session to the highest close in over a year and a half. Clearly, the bulls are having their way with the market over recent weeks.

Outside the cotton market, re-strengthening in the broader commodity complex is helping buoy cotton prices. At 75.07, the dollar is teetering on the edge of falling to its lowest level in more than fifteen months, spurring a broad array of commodity prices, including cotton. The Reuters/CRB Index is flirting with its highest close in fourteen months, while gold stands at a record, more than $1,170/ounce. And recent news of existing home sales jumping much more than expected to the highest level since July 2007 is likely to bode well for the outlook for demand for cotton home textiles, further supporting the bullish sentiment behind higher cotton prices.

Weekly Commodity Market Recap: Cotton

Unfolding events last week generally were friendly to the market, helping nearby cotton futures reach the highest daily close in fourteen months, before a collapse in technicals settled the week’s activity with little net change from the previous week. The remnants of Hurricane Ida drenched open-boll cotton from Alabama to Virginia last week, with pockets receiving up to eight inches of rain in hardly 48 hours. In particular, the North Carolina crop, which had been expecting record yields prior to the arrival of the storm, roughly 330,000 potential bales of cotton still on the stalk in the state were exposed to excessive rainfall, strongly suggesting quality may be seriously compromised as a result. Gusty winds later in the week then blew much of the heavy, soaked bolls to the ground, where they are unable to be harvested, implying yields in the state also may suffer.

Tuesday’s release of new supply/demand forecasts from the USDA generally mirrored our forecasts here, showing an outlook for tighter fundamentals, both in the U.S. and worldwide. A 502,000-bale decline from just last month in the anticipated size of the U.S. crop is likely to result in the smallest harvest in two decades. Similarly, the USDA shaved another million bales off the size of the Chinese crop for the second straight month, while historic revisions to Bangladeshi cotton consumption propelled mill demand there to a record 4.0 million bales this year. On balance, lower production and higher demand reduced projected ending stocks from last month both in the U.S. and worldwide, resulting in tighter stocks-to-use ratios, fundamentals friendly to prices. Accordingly, nearby futures closed Tuesday at 75.11 cents per pound, matching the highest close since August 2008.

Technical trading ruled later in the week, with cotton receiving little, if any, assistance from outside markets. Nearby futures moved in mirror-opposite step to the dollar each of the last nine sessions, and settled lower in the second half of the week as the dollar rebounded off fourteen-month lows. After climbing to a fourteen-month high in late October and establishing firm resistance, cotton prices remain constrained to a three-hundred point trading channel over the last few weeks. In the shorter term, we look for the market to take a second look at support levels at 69.75 and 68.80 cents per pound before challenging Tuesday’s fourteen-month high of 74.27 cents in the longer term.

Weekly Commodity Market Recap: Cotton

Cotton prices crept higher last week, as concern over the outlook for yield and quality of the Mid-South crop outweighed bearish influences from outside markets. As we feared here, the month concluded as the wettest October in over a century for much of the Delta area planted to cotton, causing the most delayed harvest on record. Additionally, the drenching showers in Delta cropland is impacting quality of the crop, ranging from boll rot and yellowing of the cotton fibers to lower average strength detailed here. While producers in the region are likely to rapidly advance picking under clear skies in the coming week, the damage has been done; the next USDA crop report in a week is likely to show a dramatic drop in the size of the Mid-South cotton harvest, buoying cotton prices.

In the shorter term, price action is likely to remain choppy, as the market ebbs and flows between good and bad news on the economy. Traders were quick to dismiss Thursday’s news of robust expansion in third-quarter U.S. economic activity, after Friday’s disappointing spending data and considering the skewed effect from government spending and one-time stimulus measures in the housing and auto sectors. On balance, the dollar is solidly up from its fourteen-month low set a week ago, hindering continued gains across a wide range of commodities, including cotton.

Total open interest has been on a tear recently, expanding to over 185,000 contracts by late October, the highest in over a year. Not coincidentally, this comes as nearby cotton futures finished last week at their highest weekly close in fifteen months. Even so, speculators widely believe cotton is undervalued, and torrential, record rains across U.S. Delta cotton is compounding speculator resolve. Technical traders see rising prices and open interest and believe another push up is coming. While open interest is at its highest level since October 2008, we note that market open interest stayed above current levels for twenty months prior to last October, suggesting the market may have much longer to persist at or above these levels.