Weekly Commodity Market Recap: Cotton

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ICE U.S. cotton futures rocketed ahead for the second straight week, capping off nine consecutive days of higher closes on the robust outlook for bullish fundamentals in the next marketing year. The nearby soared 440 points for the week to 78.79 by Friday, the highest weekly close since its March 2008 spike. At the 2010 Ag Outlook Forum just outside Washington, DC last week, USDA analysts speculated that bullish fundamentals both in the U.S. and worldwide will persist into the new marketing year. Giving its first peek at a new-crop balance sheet, the USDA looks for global mill demand to outpace production for the fifth straight year, resulting in another decline in ending stocks in 2010/11. This would mean a world stocks-to-use ratio of 41.8%, down from 45.1% estimated for 2009/10 and the lowest since 1994/95, presumably boosting prices next year. Already, the marketing year-to-date average ‘A’ Index price is 75.0 cents per pound, with prices surpassing 83 cents by late February.

Echoing sentiment expressed earlier by others, the USDA believes the U.S. crop is likely to rebound from its lowest level in a quarter century on the outlook for a big jump in plantings and presumed normal yields across the cotton belt. Already, the most year-to-date precipitation in years has fallen around Lubbock here, boosting optimism for higher yields. But higher offtake may absorb the jump in production, leaving domestic ending stocks little changed. This year’s stocks-to-use ratio of 21% is projected to remain about the same in 2010/11, implying prices are likely to remain robust. The USDA projects the marketing year average U.S. price at 64 cents, compared with 62 cents for 2009/10.

While a myopic view of the fundamentals strongly points to even higher prices, we are cautious over the long term, as even higher prices may limit the number of mills able to pay these rates. As most any textile mill will acknowledge, downstream price pressures ensure that the only thing worse than high prices is volatile prices. And this marketing year has been full of both so far, hindering mills’ ability to forward price yarn quotes for remunerative—but still competitive—price points. Since beginning the marketing year at roughly 63 cents per pound, nearby prices are up almost 40% in less than six months. And while market fundamentals may point to continued gains in prices longer term, mills are unlikely to see remunerative prices paid for yarns, impacting both cotton share and viability for many. To avoid this dismal scenario, we encourage you to speak with one of our risk management consultants here to review your exposure to risk and see how we may be able to minimize this exposure for you.

Weekly Commodity Market Recap: Cotton

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After tumbling for five straight weeks to the lowest close in three months, nearby cotton futures soared last week, posting its biggest weekly jump in almost seven years. At 74.39 cents per pound, the market finished Friday up 777 points from a week earlier to the highest close since its January 4 peak. The dramatic rebound primarily is attributable to fundamental issues directly impacting the fiber, rather than external factors swaying the tide of most commodities.

In particular, a bullish late-season revision to the USDA’s monthly WASDE report helped set the tone for the week on Tuesday morning. The USDA revised its U.S. export forecast higher by one million bales from January, the largest increase in history at this point in the marketing year. The jump is in response to robust new sales each of the last several weeks and predicated on the belief that exportable supplies from key competitors in Brazil and India may dwindle sooner than expected. In turn, higher anticipated exports in 2009/10 drove projected ending stocks for this marketing year lower by one million bales, to 3.3 million. Forecasts for higher demand and lower ending stocks tightened the anticipated stocks-to-use ratio to 21.4%, the second lowest in a dozen years. These tighter fundamentals drove nearby futures limit-up in Tuesday trading, helping shake off the bearish pall hanging over the market in 2010. Additionally, as this anticipated ratio has gradually tightened each month over most of the marketing year, it has driven futures prices higher. February’s 21.4% stocks-to-use ratio implies further gains in price may be forthcoming in the near term.

Weekly Commodity Market Recap: Cotton

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After again largely ignoring fundamentals internal to the cotton market, cotton futures prices retreated for the fifth straight week, succumbing to the overarching bearish influence of a stronger dollar. The Nearby price on the ICE Futures U.S. exchange plunged 241 points from the previous week to 66.62 cents per pound, a two-month low. This weighed on every subsequent contract month, dragging each lower again, down for every week in 2010. While the week did produce some bullish news for cotton, the dollar remains the key drag on the market.

The bulls took little comfort in robust export sales and further evidence of a smaller Indian crop last week. Net upland sales jumped to a marketing-year high of 519,500 running bales, particularly driven by big volume to China. Weekly shipments also improved, reaching almost 250,000 bales, the second-highest point so far in 2009/10. Exports to mid-tier markets like Mexico, Thailand, and Peru also climbed to marketing-year highs, and market sentiment suggests shipments in coming days are also likely to remain strong.

More voices are adding to the cacophony of suspicion that India’s harvest size is overstated, echoing our long-held argument here. Most recently, the Cotton Association of India pegged the harvest size lower from their earlier forecasts at just 30.2 million bales (170kg), down half a million bales from their previous forecast just over two months ago. We would not be surprised to see forecasts ease even lower in coming months, heartening the bulls’ position.

In spite of these signals of tighter fundamentals last week, the dollar remains the 800-pound gorilla weighing on commodity markets, including cotton. Signs of debt troubles in several European markets are sinking the euro, driving the greenback higher and dragging commodity prices lower. After reaching a fourteen-month high earlier this year, the Reuters/CRB Index is down 35 points to 258.55, a three-month low. Cotton prices are lower in concert with the collapse in the broader index. If the lack of concrete proposals to the European debt concerns from this weekend’s G-7 meeting is any guide, the euro may remain under pressure in coming weeks, implying commodity prices—including cotton prices—also may struggle to post a sustained rebound in the near term.



Looking ahead, our estimates for changes to the forthcoming USDA WASDE forecasts portend tighter domestic markets for the current marketing year:

-U.S. production for 2009/2010: We see the USDA easing its production forecast for the fourth time in five months, down to 12.25 million bales. The volume of ginning and classing of this season's crop here and here remains behind this point last year, hinting that the anticipated harvest size will contract further. In fact, we would not be surprised to see the final crop size even lower—closer to 12.1 million—but we look for the USDA to make only another incremental step in that direction in its February report.

-U.S. exports for 2009/2010: We look for the USDA to revise its export forecast higher again in February, to 11.15 million bales. Already, this moving target has been revised 800,000 bales higher over the last five months, and particularly in light of robust export reports in recent weeks, we anticipate the actual level to be higher than the current 11.0 million-bale forecast.

-Ending stocks for 2009/2010: With a 150,000-bale increase in the harvest size, a 150,000-bale increase in exports, and no presumed change in mill use, ending stocks are likely to ease by 300,000 bales from January's 4.3 million bales to 4.0 million. If so, this would mark the fifth straight month of gradually lower ending stocks. Coupled with higher demand, the lower ending stocks imply a tighter anticipated stocks-to-use ratio for 2009/10, friendly to higher prices. As a result, we look for the market to grapple in coming weeks with the opposing prospects of tighter ending stocks in 2009/10 versus the heavy influence of a stronger dollar.

Weekly Commodity Market Recap: Cotton

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Since trading at an eighteen-month high early this year, nearby cotton prices fell fourteen of the last eighteen trading sessions, down for four straight weeks. At just 69.03 cents per pound, Friday’s close is the lowest in two and a half months. While some fundamental signals last week in the cotton market improved, this latest week’s decline came in response to a strengthening dollar, lower oil prices, and weaker bean and grains prices.

First, demand-side indicators for cotton firmed last week, but did little just yet to stanch the hemorrhaging in price. Weekly export sales discussed here climbed to the highest in eleven months, driven almost entirely by robust purchases by China. Similarly, cumulative Pima cotton exports so far in 2009/10 total more than 495,000 bales, over ten times the volume shipped by this point last year, accounting for much of the recent escalation in price for this species here. Even U.S. mill demand is showing signs of life. Recent months’ annualized cotton usage in domestic mills is averaging higher than the USDA’s latest 3.4 million-bale forecast, helping support the market. But in spite of these signs of improved demand prospects, external influences maintain a heavy influence over cotton, dragging prices lower again last week.

In particular, the resurgent dollar is weighing on a host of commodity prices, including cotton. Since reaching an eighteen-month low in November, the dollar is up six of the last nine weeks, closing Friday at 79.65, its highest weekly close in more than six months. Better-than-expected GDP data in the U.S. last week suggest the U.S. economy is recovering more rapidly than its European or Japanese counterparts, helping spur the greenback higher. A slew of key economic reports this week—including non-farm payroll data—will shed more light on this notion and will direct the dollar further in coming days. Over the last several years, few variables have had as large an impact on cotton prices as the value of the dollar. This trend continues in 2010, as the rebound in the dollar is pulling cotton prices lower, as the graph below shows.

Moving in tandem with weaker cotton prices, crude oil prices are also lower each of the first several weeks of 2010. Since reaching a fourteen-month high early this year, the price of a barrel of crude has fallen over ten dollars to a three-week low of $72.89 amid concerns over Chinese monetary policy and U.S. banking regulations. Analysts expect geopolitical tension, ongoing financial risks and further liquidation of speculative long positions to continue to weigh on oil prices in coming weeks, hindering any rebound in smaller markets for other commodities like cotton.

Likewise, the drag on cotton prices from a stronger dollar and weaker oil prices so far this year is being felt in corn and soybean prices. As prices for all three have eased over the first few weeks of the New Year, we don’t look for this to have a marked decline on the outlook for U.S. plantings this spring. While cotton is lower from a few weeks ago, so too are other crops, and cotton is still trading for a relative premium against these other crops versus this time last year. Accordingly, we maintain our outlook that cotton plantings in the U.S. will rebound in coming months, perhaps upwards of 10%, outpacing the percentage increase in corn or bean plantings. This implies U.S. area may exceed 10 million acres, well up from last year’s 9.15 million acres, the lowest in over a quarter century.