Weekly Commodity Market Recap: Cotton

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Cotton enjoyed another week of gains, finishing the year with its highest weekly close since the March 2008 spike. Re-strengthening global demand signals continue to support price, along with soaring trade on China’s Zhengzhou Commodity Exchange (ZCE). A firmer demand picture came into focus this last week, framed by good news in several markets. U.S. export sales of Upland cotton hit a marketing year high of 349,576 bales during the previous week, with much of these sales to China. News of another month of double-digit growth in Pakistani cotton yarn exports here suggested fabric mills across Asia are ramping up production. Likewise, Thai cotton yarn exports detailed here soared at the fastest pace in six years, echoing this sentiment. Downstream, faster growth in retail apparel sales in several markets including Taiwan, Canada, and Poland here confirms the improving prospects for cotton mill demand, as once-wary shoppers begin to return to stores in key markets around the world.

A second key driver impacting prices both in the U.S. and around the world has been the impressive performance of futures trading on China’s ZCE. Prices on the most-trade May contract stand at a record level, followed by soaring volume and open interest. As we discuss here, in just the last week, the May contract soared 835 yuan (5.55 cents per pound) to its new record, as volume more than doubled over the same short period to a record 584,560 contracts. Short supplies, transportation bottlenecks, and faster growth in mill demand for cotton are helping propel Chinese cotton futures prices to these uncharted heights, but the potential for increased cotton plantings this spring may ease price pressure in coming months.

In light of these bullish fundamentals, we look for prices to continue to move sideways to higher over the next few weeks, which will likely prompt a sizable increase in U.S. cotton plantings in the spring. Wednesday morning the market will digest the latest economic outlook from the National Cotton Council, followed by a detailed supply/demand outlook from the International Cotton Advisory Committee and comments on regulatory oversight of the cotton market from CFTC Commissioner Michael Dunn. These reports could have an impact on both trading and price action in coming weeks, and will warrant close attention.