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.