Weekly Commodity Market Recap: Cotton

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Futures prices eased lower last week, remaining well within a six-cent trading range established over the last five weeks as concern mounts over soaring fiber costs and higher domestic cotton plantings this spring. Nearby cotton prices retreated 2.49 cents to finish the week at 79.69 cents per pound, the lowest weekly close since mid-February. While the fundamentals continue to point to higher prices for the 2010/11 marketing year, near-term bulls are running out of steam, promising to make for volatile spring trading.

A handful of factors that contributed to drive prices higher in recent months seem to be losing steam in recent days. First, on the old-crop supply side, government efforts in China to relieve transportation bottlenecks in Xinjiang Province—China’s largest cotton producer—finally seem to be having their desired effect. Daily railcars for moving cotton from farms in the West to mills in the East increased to 170-180 since March 23, and could possibly increase further to 250. While this is rather late in the procurement season for the area, the increase is likely to ease supply constraints somewhat, whether actual or perceived. Additionally, the dollar is trading at a nine-month high on European debt concerns that are sinking the euro, hindering gains in commodity prices.

On the demand side, complaints from downstream producers in different markets are mounting over perceived exorbitant yarn prices. Indian knitwear manufacturers are unsettled over soaring cotton and yarn prices, with reports suggesting the sector is planning to ask buyers to pay one-fifth more to meet rising yarn prices. Similarly in neighboring Pakistan, angst over soaring yarn prices and perceived tight supplies here is pitting the yarn sector against downstream interests like never before, with the exasperated government unlikely to find a suitable compromise to satisfy both sectors. In China, rapid gains in cotton and yarn prices also are eating into the profit of downstream manufacturers. In particular, smaller yarn and fabric makers are cutting production or increasing polyester use as we demonstrated here to combat the surge in cotton fiber and yarn prices.

Another consequence of the sustained rise in cotton prices witnessed over the last year is likely to be a dramatic jump in cotton acreage in several key producers around the world. In particular, an issue likely to be closely watched by the market this week is the annual Prospective Plantings report from the USDA. This report is expected to show increases of 1 to 1.5 million acres, with potential production of 16 million bales or more. This would mark a reversal in trend from the declines witnessed over each of the last three years and a dramatic rebound from the 9.1 million acres planted a year ago, the lowest in more than a quarter century. While a 16 million-bale crop is comparable to the average volume produced over the last three decades, it is much larger than the harvest sizes each of the last two years. While we remain bullish for price over the long term, these issues are likely to temper much of the enthusiasm for robust gains in price witnessed over the last year. Instead, more modest gains in the long term may be more likely, while downstream resistance from fabric and apparel manufacturers is likely to make for choppy trading in coming weeks.

Weekly Commodity Market Recap: Cotton

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Cotton prices managed to rebound last week, in spite of mounting bearish evidence hinting at the increased potential for a pullback. Viewed from the bulls’ perspective, cotton’s climb last week came on news of higher unfixed on-call sales and the biggest U.S. cotton exports in nine months. The CFTC’s latest Cotton on Call report indicates unfixed on-call sales are growing at a rapid pace, particularly in the July contract. Total unfixed on-call sales merchants made to textile mills jumped to 68,829 contracts, the highest in two years, supporting higher ICE futures. The July contract rose by 816 contracts to a record 23,159. There are only 11,713 unfixed on-call purchases merchants have made from growers, providing very little in the way of an “offset”. As mills continue to add to their on-call position, it represents more futures that will need to be bought during a smaller window of time, suggesting higher prices are likely.



The bulls also point to the latest report of robust sales and shipments abroad for cotton. Total exports of Upland and Pima cotton reached 312,661 480-lb. bales in the week ending March 11, driven by soaring volume to America’s largest market. Exports destined for Chinese textile mills surged to 152,268 bales, the highest level so far this marketing year. In fact, this weekly volume was almost as much as the U.S. shipped to all other markets combined, reflecting China’s expanding share of total U.S. cotton exports over the last several months. The surging shipments to China in recent weeks echo our observation here of rapid growth in total Chinese cotton imports and suggest cumulative U.S. exports to China this marketing year may climb to the second-highest level ever recorded, something certainly bullish for price.

But from a stronger dollar to higher acreage forecasts for spring plantings, different bearish indicators are looming and likely to offset much of the enthusiasm for higher prices in coming weeks. Greece’s ongoing debt problems led to a weaker euro and stronger dollar last week, limiting gains on commodities. The U.S. Dollar Index finished the week higher at 80.7, rivaling its highest level in 21 months and hindering gains across a variety of commodities.

Finally, some price impacts may be coming from excellent topsoil moisture reports across the South and private acreage estimates released last week. One planted acreage report disseminated last week pegged spring U.S. cotton plantings at 10.3 million acres, well up from a year earlier. The market is likely to trend sideways in coming days, in anticipation of the March 31 Prospective Plantings report from the USDA. While the market looks for an increase in cotton acres this spring, the question is how much. Certainly, weather in coming months will impact yields—something difficult to accurately gauge this early in the year—but one early hint at the potential for better-than-average yields is ample topsoil moisture. The latest nationwide map here shows much of the South is wetter than normal, with no cotton acres reported as abnormally dry. This early sign hints that the surge in price over the last year may slow in coming weeks under the weight of a much larger cotton crop.

Weekly Commodity Market Recap: Cotton

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After rocketing ahead in February to its highest point in two years, cotton futures prices retreated last week, falling four of five trading days as the latest WASDE report from the USDA failed to impress and prices responded both to overbought technicals and mounting concerns about the economy. The Nearby finished the week at 80.47 cents per pound, off 1.96 cents from the week before. As we suspected here, the latest USDA forecasts saw global production ease, while U.S. fundamentals were little changed from the previous month, supporting our notion that global drivers would have more of an impact on the market this week than the domestic market. In fact, one could argue that the ‘news’ of a smaller global crop had already been factored into the market, as this information had been widely publicized for some time. Aside from this issue, there were few fundamental surprises in the report to drive price, allowing bearish technicals and outside influences to dictate price for the week.

Weighing negatively on the market this week were several overbought indicators and more worries about the U.S. economy. For example, as prices soared to their two-year high in early March, the RSI signaled the need for a correction. At 77.72, this indicator reached its highest level in 21 months, a few standard deviations away from its long-term 50.0 mean. Economic news last week also weighed on the market. Among other news, weekly U.S. jobless claims for February were higher than expected, and Chinese inflation rose to a sixteen-month high, hinting that tighter monetary policy may stifle rapid consumer demand there later in 2010.

But after four straight losses, prices rebounded on Friday, recouping mid-week losses. Stronger-than-expected February retail sales figures encouraged shorts to cover on Friday, in spite of sagging clothing store sales. A weaker dollar on Friday also fueled speculation of a likely improvement in relatively unimpressive U.S. export sales. Friday’s Commitment of Traders report showed the large specs adding 4,101 longs and 412 shorts to their combined futures and options position in the week ending March 9th, helping spur the improvement in price. Technically, trades formed a ‘bullish engulfing’ pattern on the Japanese candlestick charts. What’s more, Chinese futures prices rebounded Monday, with Nearby ZCE prices reaching 16,295 yuan per ton ($1.08 per pound), close to the ZCE record-high set in early January. This late-week turnaround leaves us believing the market may have found significant near-term support. The longer-term question remains as to how much global cotton acreage will expand this spring, and how much further the bulls will drive the market before bigger crop prospects come into focus this fall.

Weekly Commodity Market Recap: Cotton

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After surging ahead in recent weeks on the outlook for tighter domestic and global fundamentals, cotton prices moderated last week in advance of the USDA’s next WASDE report, easing as technicals turned increasingly overbought. At 84.60 cents per pound, intraday trading last week reached the highest level in two years, following three straight weeks of gains that saw nearby futures soar 17 cents in less than a month. But the market may have overreached—at least for the time being—suggesting prices may consolidate in the short term as attention increasingly turns from tighter old-crop fundamentals to the longer-term outlook for a bigger U.S. and world harvest this autumn.

Wednesday’s WASDE report is likely to show few changes in U.S. old-crop fundamentals, tempering the recent streak of gains in domestic prices. Evidence suggests the U.S. balance sheet only may tighten marginally if at all, while global production is likely to see a more pronounced decline. We have long argued here that India’s harvest size may be overstated, and recent forecasts from China’s NBS here may color the USDA’s projections this week. This suggests global drivers may have more of an impact on the market this week than the domestic market, contrary to the trend reflected over recent months in the graph below.

On balance, futures trading last week was quiet and mostly dull, with traders focusing on the consensus outlook emanating from the International Cotton Association conference in Singapore. After the week’s high was set Monday and the low set Tuesday, trading during the rest of the week remained within that range, with volume well below trend. Presenters’ comments at the ICA meeting were mostly bullish, suggesting that supplies will remain tight through 2010, but likely higher plantings this spring in a number of markets are likely to boost global cotton supplies in 2011, unless crop troubles in China or India cause prices to “explode”. With the global economy on the rebound, increased demand for cotton in the new marketing year is all but certain. As a result, the longer-term outlook for price will be heavily influenced by how much global production rebounds, causing the market now to increasingly turn its attention to pre-plant weather conditions in key markets around the world.