Weekly Commodity Market Recap: Cotton

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The holiday-shortened week saw a flurry of reports from around the globe that worked to tug the cotton market higher and lower, resulting in another week of little net change in cotton prices headed into the final trading week of the year. Over the last month, nearby cotton prices remain constrained to a relatively narrow 478-point trading range, with prices retreating three of four days traded last week closer to the lower end of that range. Even so, at 73.65 cents/lb, last week’s close suggests that cotton prices are poised to finish the year higher eight of the last nine months, with the highest monthly close in more than a year and a half.

Helping drive prices higher, reports last week added to sentiment of improving demand around the world. Evidence here shows cotton imports into Thailand—the second-largest cotton-consuming market in Southeast Asia—soared at the fastest pace in four years, spurred on by a re-strengthening currency and robust demand for cotton yarn exports. Fiber and textile prices in China here climbed to a 13-month high as output in the world’s largest textile producer re-accelerated even further. Similarly, Indian cotton textile production here jumped at a double-digit pace in October—the biggest increase in two and a half years—spurred on by the first year-over-year increase in textile exports in over twelve months. Further downstream, Canadian clothing store sales detailed here rose for the first time in thirteen months in October, supported by improving economic conditions in our neighbor to the north.

But to be sure, not all measures of demand last week were optimistic, offsetting the enthusiasm for higher cotton prices. Here, a streak of successive declines in German textile exports over the last two years is likely to drag textile output in this market to the biggest drop on record in 2009. And annualized mill consumption of cotton in the U.S. sank for the 23rd straight month in November here, falling just below the latest USDA projection for 2009/10, suggesting this forecast may be mildly overstated. U.S. cotton exports also continue to fare poorly in the latest week, and remain well off the pace necessary to reach the latest USDA forecast of 11.0 million bales this marketing year. Adding to the bearish concern, the latest data show Russian cotton yarn and fabric output are both likely to see a record plunge in 2009, with volume falling to the lowest levels years. And finally, while data from MasterCard Advisors' SpendingPulse estimated U.S. holiday sales expanded 3.6%, the report showed lower sales of women’s and specialty apparel, echoing our concerns for the crucial holiday shopping season here.

These offsetting signals add to the market’s hesitation and lack of clear direction in recent weeks. And after climbing each of the last three weeks, the dollar wavered last week, further clouding the outlook. We continue to think price may be near the bottom of its recent consolidation range, and may trade modestly higher into the New Year. But longer term, we look for U.S. spring cotton plantings to jump at a double-digit rate from last spring’s low, suggesting increased supplies will help counter the global trend of improving demand prospects in many markets, moderating the long-term uptrend in price.

Weekly Commodity Market Recap: Cotton

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As the holidays approach, the U.S. cotton market remains relatively quiet, locked in a narrow 240-point range over the last month, with little fundamental news of substance to steer price higher or lower in recent days. In the bears’ camp, most commodities were on the defensive last week as the dollar index rallied from its lowest level since August 2008 to a three-month high. Corn, wheat, and soybean each edged lower last week as the greenback rose for the third straight week. Also, a Memphis-based forecasting group released one of the first crop outlooks for 2010, calling for domestic cotton acres to expand about 10% from this year’s quarter-century low to 10.0 million acres. And while the longer-term outlook for the global textile complex continues to improve in the wake of last year’s economic contagion, several markets around the world still saw output fall again in the latest month—albeit at slower rates—postponing any premature calls of the end of the global textile recession.

The bulls take comfort from a few bits of news last week, offsetting the bears’ momentum and keeping cotton prices range-bound. Retail apparel markets in several countries continue to percolate, suggesting better, frothier days lie ahead. And news from China indicates that output in most sectors of China’s textile behemoth continues to re-accelerate, shaking off the lingering effects of last year’s slowdown. Shorter term, we are wary of choppy trading on holiday-induced lower volumes as the market trudges through this latest consolidation pattern. We remain cautiously bullish on price in the medium term, but believe the outlook for increased global plantings longer term will suppress the market’s exuberance for higher prices into the spring.

Weekly Commodity Market Recap: Cotton

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The cotton market digested a slew of new data last week ranging from tighter raw cotton fundamentals to lackluster domestic clothing store sales, but offsetting sentiment left futures trading relatively listless and little changed for the third straight week. The market began the week on a sanguine note following upbeat reports of improving retail demand in Germany here and France here, two of Europe’s largest apparel markets. Double-digit growth across most sectors of China’s textile industry propelled textile prices here to the highest levels this year, contributing to the bullish sentiment. Coupled with the first growth in textile and apparel output in Turkey in over a year and a half here, global textile markets are as optimistic on the future as they have been in two years.

But perhaps a telling event came Thursday on the release of the latest USDA supply/demand forecasts for this marketing year. While the lower-revised ending stocks exactly matched FCStone forecasts here and produced the most bullish stocks-to-use ratio in over a year and a half, the market effectively shrugged off the news, with futures stalling against overhead resistance and probing for underlying support. Pundits argue that the market may have already factored in these fundamentals. In fact, breaking news reported here last week that China would distribute quotas in April 2010 for another million tons of cotton imports did little to move the market. It seems no bullish news is able to drive futures higher, suggesting overbought conditions and a pending correction. Of course, funds simply may be taking money off the table prior to the year end, contributing to the lack of upward movement in price. Or the recent rebound in the dollar to seven-week highs may be hindering enthusiasm for higher fiber prices. Regardless, the stall has us concerned.

We won’t rule out that a dip may occur, but sentiment remains increasingly bullish both from the trade and speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain lackluster until after the New Year. Looking further into 2010, we also remain cautiously bullish through the winter, but acknowledge that a likely rebound in cotton plantings in the U.S. and China here this spring may temper enthusiasm for even higher prices that are already well above their long-term average.

Are ICE and ZCE Cotton Futures Poised to Strengthen Further in Second Half of 2009/10?

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After the unprecedented spike in global cotton prices witnessed in 2008 and the resultant shockwaves felt thereafter across the global cotton market, prices in 2009 returned to levels more in line with traditional influences. These drivers include factors internal and external to the cotton market, and show strong correlations to futures prices. Looking ahead to 2010, these signals suggest cotton prices are likely to remain firm, above their long-term average level, as the global economy re-accelerates from a tumultuous 2008, driving renewed growth aggregate demand for cotton textiles and apparel.

Perhaps one of the most influential drivers on global and U.S. cotton prices is fundamental analysis. The study of the ebb, flow and interaction of supply and demand yields insight into current price levels and can hint at the future direction of price. A measure of this interaction, the stocks-to-use ratio, is often strongly correlated with price. More specifically, the tighter or looser the ratio between anticipated ending stocks and expected demand changes, the higher or lower we can expect price to trend. This relationship is evident in the graph below, showing that in recent months, the forecasted stocks-to-use ratio for the U.S. cotton market has fallen, or tightened. As this has occurred, the monthly average futures price has risen in tandem, breaching 70 cents per pound over the first few days in December.

Analysis of the stocks-to-use ratio can yield important clues to the future direction of price. For example, the USDA’s November forecasted stocks-to-use ratio for the 2009/10 marketing year is 35.2%, the smallest ratio in fourteen months. Not coincidentally, November’s average prices for nearby cotton on ICE Futures U.S. were 68.73 cents per pound, the highest in fifteen months. Reports of likely changes in supply and demand can cause this anticipated ratio to rise or fall, in turn driving price lower or higher in tandem.

Looking ahead to 2010, we expect the U.S. stocks-to-use ratio to tighten further in coming months, suggesting price could strengthen even further. We base our forecast on prospects that the U.S. harvest size may be smaller than currently projected, and on the belief that U.S. exports may outpace the current target in the remaining months of this marketing year. Certainly, this bullish outlook is tempered by the notion that prices already outpace the level suggested by this historic relationship. This implies that any continued appreciation in futures prices may not be commensurate with continued declines in the stocks-to-use ratio. Regardless, we look for the market to remain firm well through winter, perhaps until attention turns to the outlook for higher cotton plantings again in the spring.

Looking more broadly across the U.S. economy, factors external to the cotton market are also having a strong influence over cotton prices. First, the weaker U.S. dollar is boosting the outlook for a host of exportable commodities, including cotton. Both the dollar and cotton prices moved in lock-step over the last two years and presently stand near levels not seen in sixteen months. The outlook for the dollar in 2010 is dependent upon myriad factors both in the U.S. and abroad, including the outlook for interest rates, capital markets, inflation, government policies, and other economic indicators. While it remains impossible to accurately forecast the value of the dollar, we, along with many other market observers, remain pessimistic on the prospects for the greenback, helping support the outlook for a range of commodity prices, including cotton.


Second, speaking of capital markets, cotton prices have had an uncanny correlation with equity prices in the U.S. recently. As darkening clouds over the U.S. economy grew more ominous in the final months of 2007, stock markets in the U.S. began a hasty retreat as investors moved money to safer investments. After peaking in October 2007, the Dow Jones Industrial Average lost more than half its value over the next year and a half, falling to its lowest level in a dozen years. Since then, the Dow has posted one of its biggest rebounds in history, soaring roughly 50% from its March 2009 low. The Dow now sits near its highest level in fourteen months. Similarly, after spiking to the highest level in years in early 2008, cotton futures prices plunged more than 60% over the next eight months to 39.14 cents per pound, the lowest level in more than six years. Since then, nearby cotton prices have steadily climbed, surpassing 70 cents for the first time in sixteen months. Similar to gauging the value of the dollar, forecasting stock prices naturally is next to impossible. But many analysts agree that the impressive jump in the Dow in 2009 is unlikely to be duplicated in 2010, suggesting that any continued re-strengthening in cotton prices is likely to come at a slower rate than witnessed this year.
Aside from fluctuations in cotton supply and demand and factors external to the cotton market, the sales of merchants and positions of large traders and funds in the market continue to be strongly correlated to cotton prices. Week-to-week on-call sales across all contract months continue their co-movement with nearby cotton futures over the last two years. In fact, less than two months ago unfixed call sales reached 54,135 contracts—their highest level in fourteen months—at the same time that weekly nearby prices surpassed 68 cents, the highest level in sixteen months. In the weeks since, a gap opened between the two measures. But we look for this divergence to narrow in coming months, whether in the form of lower cotton prices or higher unfixed call sales. Given the bullish other factors noted earlier, we are more confident that unfixed call sales will slowly expand to fill that gap.


The role of hedge and index funds is likely to remain integral to commodity prices—including cotton—well into 2010. The increasing prevalence of long-only commodity indexes and the increasing acceptance of commodities as an asset class are helping drive interest—and therefore volume—in this area, boosting prices. Likewise, the prominence of agricultural commodities in these indexes has substantially increased in recent years. The cotton market has enjoyed a relatively consistent share of the surge of index and hedge fund monies into the market over the last two years, supporting price. In fact, for well over two years, the ebb and flow of index funds’ net positions have mirrored the rise and fall of cotton prices. Just as the net position of index funds is hovering near a fourteen-month high, so too are cotton prices. Looking ahead, aside from political wrangling over new bills governing increased transparency for some larger market participants, we see little reason to expect the inflow of hedge and index funds to ease in 2010, supporting an outlook for robust price in the months ahead.

Lastly, we turn away from the U.S. futures market to the impressive performance of cotton on the Zhengzhou Commodity Exchange. Since commencing trading on the ZCE over five years ago, cotton futures prices have trended in step with their American counterparts, reflecting efficient market-clearing and price-discovery mechanisms in place in both markets. Clearly, the issues that impact price in one market are felt half a world away, driving price in the other market.

This relationship has been particularly evident over the last year, when prices on both the ICE Futures U.S. and the ZCE exchanges reached near-term lows on virtually the same day. Since then, nearby prices on both exchanges have risen in step with one another to the highest levels in roughly fourteen months. It is only over the last month that ZCE cotton prices continued to climb, far outpacing gains on the ICE and peaking recently at record levels just as market volume also soared to more than 500,000 contracts, also a record. This surge in price easily outpaces gains in downstream intermediate yarns and fabrics and appears inherently inflationary—and therefore unsustainable. While we are optimistic on the prospects for continued strength in global cotton prices into 2010, we are not as confident ZCE prices will be able to maintain such a premium. We expect that any continued gains in ICE futures prices are unlikely to be met with commensurate increases in ZCE prices. And should this sudden spike in ZCE volume and open interest suddenly plunge, we would expect Nearby prices in China to retreat closer in line with U.S. futures prices in coming months.

Weekly Commodity Market Recap: Cotton

Bullish internal influences grappled with bearish external drivers last week, keeping cotton mired within the previous week’s trading range. In the global cotton market, supply and demand indicators both hinted at tighter fundamentals in coming months. In the U.S., an early-season snow here blanketed much of the remaining unpicked northern cotton crop from New Mexico across the Mid-South. While this snow did not last long, this year’s crop is the latest on record and any remaining fiber still in the field is likely to see big increases in boll rot and declines in yield and quality in wintry weather increases. Across these states, only about 10% of the crop remains in the field, accounting for roughly 300,000 bales.

Globally, voices in Pakistan and India are adding to the growing chorus calling for all-out bans on cotton exports from both countries. Local industries in both markets are concerned over intensifying shortages of fiber and yarn here, prompting calls to both governments to take action. While we do not expect either administration to implement these requested bans, both governments will be obliged to listen to the concerns of the industries and may offer some token policy to encumber exports and placate the industries, either in the form of additional registrations or new export levies. While not as severe as an all-out ban, this action would remain bullish for global prices.

On the demand side, U.S. export sales were phenomenal for a holiday-shortened week, even if shipments lagged the pace we would have like to have seen. Net upland sales reached 250,700 running bales, the most in more than three months. China remained the dominant buyer, followed by strong sales to Turkey and surprisingly to Brazil. We are anxious to see if this jump will continue next week, or if mills are guilty of panic buying once again.

Speaking of textile mills, the weekly Cotton On-Call report here raised a few eyebrows. After falling for five straight weeks, unfixed on-call sales made by merchants to textile mills increased by 3,612 contracts last week and now stand at 49,582. Meanwhile, unfixed on-call purchases mills have made from growers grew only 92 contracts to 9,064. The March contract shows a greater imbalance, with unfixed on-call sales increasing 5,413 to 21,111 while on-call purchases fell 360 to 3,258 contracts. If mills are not proactive about fixing their March cotton, it is not entirely out of the question that we may see another bullish repeat of the December situation where mills need to fix, and there are few sellers left right before first notice day arrives.

Outside the cotton markets last week a stronger dollar, a retreat in crude oil prices, steep losses in gold futures and weak prices for grains all weighed on cotton futures. In spite of the bullish influences noted earlier, nearby cotton futures sank two points from the week before to 73.82 cents as these external factors weighed on price. Late in the week, a rally in the dollar, spurred by thoughts that interest rates may rise sooner rather than later after the economy lost a much fewer-than-expected 11,000 jobs last month, exerted broad influence on commodities. NYMEX oil sank to $75.47 last week, its lowest weekly close in two months. After soaring thirteen of the last fifteen weeks to a record high last week, gold also lost some of its luster following a Friday sell-off, sinking well below $1,200/ounce. Alternative crops also wilted under the dollar pressure. After reaching a six-month high last Monday, nearby wheat futures fell each of the next four days, trending lower in step each day with lower corn prices. As these opposing forces jostle for the dominant influence over cotton prices, we still look for the market to move higher, just not quite yet.