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The corrective consolidation in prices extended into the latest week, as weaker cotton fundamentals, plunging Chinese prices, and lower commitments of traders data weighed on U.S. prices. The nearby March contract finished the week down a modest 36 points from the week before, at the lowest close since mid-November.
The week began with an impressive 180-point jump Monday, buoyed by a weaker dollar and sentiment for tighter global ending stocks in Tuesday’s WASDE report from the USDA. However, the optimism for higher prices sagged Tuesday, with prices falling three of the next four days following release of the WASDE report. Tuesday prices gave back most of Monday’s gains, falling 145 points. While USDA projections for U.S. fundamentals closely matched FCStone forecasts, the USDA figures for global supply and demand were more bearish than the market had anticipated. The bearishness carried over into the following day, when Wednesday prices tested the previous week’s low of 72.43, before closing at 73.43, up 64 points. The only other note of bullishness came Thursday following the release of the U.S. export sales report. At 460,726 480-lb. bales of Upland and Pima, sales climbed to a marketing-year high. Similarly, exports jumped in the latest week to 211,891 bales, the biggest volume since early October. Cotton destined for China accounted for the bulk of the surge, with weekly shipments the most in eight months. But in spite of this news, prices eased lower each of the last two days of the week, finishing at 72.08—a seven-week low—sunk by weaker Chinese prices and a stronger dollar.
Even as prices have eased from recent highs on the ICE Futures U.S. exchange, prices on China’s Zhengzhou Commodity Exchange have fallen much faster, weighing on global markets. Since peaking on January 4, the most-traded May contract is off 1,010 yuan per metric ton (6.72 cents per pound) to 15,830 yuan per ton, outpacing the 3.92-cent drop in March futures on the ICE exchange. Market open interest is well off its record peak set two weeks ago as well, falling by more than a third. The plunge both in open interest and prices on the ZCE is pulling market prices on this exchange closer into parity with U.S. futures prices, something we anticipated here.
U.S. futures also are easing lower on signals from the trade. First, reports of lower unfixed call sales from the CFTC weighed on futures prices last week. A significant net reduction took place on the mill side in unfixed on-call positions during last week's price skid, where mills fixed prices on 3,324 lots to reduce unfixed call sales to 49,548 lots. Unfixed holdings on the producer side increased a net 46 lots to 10,524. A second report from the CFTC showed funds and speculators cut cotton futures-options net longs to lowest combined total since week ended Nov. 24, trending in step with the decline in futures prices. Commercials reduced net shorts to 53.2% of open interest, down 10.7 percentage points from eight weeks earlier. Meanwhile, funds and speculators reduced their net longs by a combined 8,587 lots in cotton futures with options during the week ended last Tuesday, according to supplemental data reported by the CFTC Friday. They were net long a combined 131,333 lots, the lowest since the week ended November 24. Trend-following funds trimmed their net longs by 6,255 lots to 41,049, index funds pared theirs by 2,281 lots to 78,055 contracts, and small specs cut theirs by 80 lots to 12,299. The reduction by index funds came on the heels of earlier expectations for a fresh influx of money into the cotton market around the first of the year as a result of rebalancing and has sapped much of the market’s enthusiasm for higher prices.
As a result of the weaker global fundamentals, steep drop in Chinese prices, and unexpected declines in traders’ commitments, futures prices are well off their early-January highs. However, merchants still need to purchase more futures contracts than sell in order to even out their on-call positions, suggesting sentiment has not tilted to the bears just yet. We continue to expect prices to move sideways to higher over the next few weeks, once this correction is fully digested. But should alternative row crops remain at current levels, this divergence in prices will likely prompt a modest increase in U.S. cotton plantings in the spring, which longer term may stem the gains in cotton prices.
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