Weekly Commodity Market Recap: Cotton

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The ebb and flow of the cotton market turned decidedly in the direction of the bulls last week, with several indicators helping prices advance. Cotton broke out of its horizontal trading range established over the last two months, primarily driven higher by a surprise announcement here that India would suspend registrations and exports of cotton for the time being, effective immediately. Responding to the steep increase in local cotton prices, India’s Office of the Textile Commissioner took this unusual move in order to boost domestic supplies and presumably temper the recent gains in local prices. Ironically, this action is likely to deplete already-short stocks of exportable supplies in the rest of the world, driving global prices higher. In response, Nearby prices on the ICE Futures U.S. exchange gapped higher on the news, surging 619 points on the week to close Friday at 86.20 cents per pound, the highest weekly close in fourteen years. Similarly, the Cotlook ‘A’ Index, a proxy for global prices, soared in step to 91.30 last week, the highest level also since the mid-1990s, reflecting higher prices worldwide for cotton.

Also bullish for price was news of a spurt in weekly exports of U.S. cotton here. Shipments climbed past 350,000 bales for the first time this marketing year, reflecting strong growth to a number of key markets. In particular, cotton destined for Chinese and Bangladeshi mills rose to the highest volume so far this marketing year. With rumors circulating that China is set to increase its tariff rate quota again soon coupled with news that India likely will not be nearly as large a competitor in coming weeks, U.S. cotton stands a strong chance of surging to China in the remainder of this marketing year. Also, forecasts for record mill demand and imports of cotton in Bangladesh suggest U.S. cotton may fare well this year as well. On balance, we look for U.S. cotton exports to follow their normal seasonal trend of accelerating in the remaining weeks of the marketing year, with mounting evidence suggesting shipments in 2009/10 could exceed the latest USDA forecast of 12.0 million bales as we first suggested here.

Although market fundamentals point to higher cotton prices, last week’s spurt may have driven the market into overbought territory—especially if the credit situation in Greece causes speculators to lighten up on risk. In the past four decades, there have only been five price moves above 90 cents per pound, and as cotton prices begin to approach this psychologically important level, the market may find willing sellers, as weak longs and commercial traders try to lock-in relatively high historic prices. The most recent Commitment of Traders report shows commercial traders increasing their net-short cotton position by nearly 11,500 contracts as of April 13th. This was before India’s announced export ban, as well as before prices moved above the consolidation range established over the last two months. Next week’s report will be interesting to see if commercials continued to sell into the rally, or if speculative accounts, mainly trend-following funds, were adding to their long positions on the chart breakout. One thing that appears evident is that cotton traders should have an interesting trading environment well into 2010, and that risk exposure for both producers and consumers is likely to be more pronounced than in recent memory.

Weekly Commodity Market Recap: Cotton

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As both supply and demand signals both grew louder in recent days, nearby cotton prices last week remained firmly rooted within their trading range established over the last two months, with neither longs nor shorts eager to commit to either direction. On the supply side, production prospects continue to improve in several markets. The Australian harvest is advancing under near-ideal weather conditions here, suggesting yields and crop size may be somewhat larger than current USDA forecasts indicate. In the Northern Hemisphere, hotter-than-normal springtime temperatures across much of India detailed here hint at a wetter-than-normal monsoon, boosting early projections for yields for several crops, including cotton. And in the U.S., adequate subsoil moisture levels combined with dry weather across much of the Cotton Belt here are allowing producers to commence plantings with a fair bit of optimism for the new crop. Each of these supply-side indicators turned more sanguine for yields in recent days, adding to the bears’ argument for lower prices.

At the same time, demand signals continue to firm in several markets as the global economy recovers and re-accelerates, reinforcing the bulls’ position for continued gains in prices. Chinese cotton imports discussed here tripled their year-ago volume in March, climbing to the highest volume in almost four years. Rampant speculation persists that China will issue additional import quota again soon to ease an expected supply shortfall. If so, this would likely propel futures prices higher, as the U.S. remains the residual supplier on the world market. Here, Turkish purchases of U.S. cotton rose to the highest February in several years two months ago, trending higher with improving mill demand in Turkey and accelerating season-to-date growth for the second-largest market for U.S. cotton exports. Even U.S. mills are enjoying new-found exuberant business, with March year-over-year textile output here climbing at the fastest pace since 1987, boding well for cotton consumption prospects.

The juxtaposition of louder arguments from both the bulls and bears leaves cotton prices mired in their same trading range witnessed since mid-February. At 80.01, the Nearby contract rose 1.94 cents on the week, oscillating lower then higher for the sixth straight week. Even the technicals appear indecisive right now. Momentum oscillators and moving averages are providing little clue to the direction of general momentum. Long-term moving averages are still trending higher, while short-term moving averages are moving sideways along with price. The crossing of the ten-day and forty-day moving averages is a bit bearish, but only slightly so considering the forty- and fifty-day averages are still in a solid uptrend.

Outside indicators ranging from the fallout from Goldman Sachs to the euro presently are somewhat bearish for cotton, but we take notice of China’s looming impact from higher tariff rate quotas. Greek debt issues and the impact on Europe from the Icelandic eruption are sinking the euro and boosting the dollar, pressuring commodities lower. But should Chinese imports surge even more in coming months, this could trump most other near-term drivers on the market. We find little reason to commit to either direction so long as the market stays range-bound, although we continue our longer-term bias to an upside breakout over a move lower out of the recent trading range.

Weekly Commodity Market Recap: Cotton

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Futures prices rebounded during last week’s holiday-shortened trading, as a decline in the dollar and robust export sales were friendly to cotton prices, with futures remaining well within a six-cent trading range established over the last six weeks. Nearby cotton prices rose 181 points on the week to close at 81.50 cents per pound, with three days of higher prices offsetting Tuesday’s modest decline. Traders last week viewed the USDA’s Prospective Plantings report as a non-event. The 10.5 million-acre forecast for spring plantings was close to market consensus and our own projection discussed last week here. With this outlook already factored into the market, traders instead discerned price direction from other factors.

A more pronounced impact on the market came from a weaker dollar, which boosted prices for several commodities, including cotton. The U.S. Dollar Index lost over half a point last week, closing at 81.44. This spurred oil prices to almost $85/barrel late last week, nearing the highest point in seventeen months. Oil also is likely to benefit from Friday’s sanguine jobs data, igniting hopes of a pickup in energy demand. Longer term, higher oil prices could support higher synthetic fiber prices, helping shift demand back to cotton.

The weaker dollar also boosted prices for a host of commodities, helping drive the rebound in cotton prices. The Reuters/CRB Index jumped last week to more than 276.4, nearing its highest level in two and a half months. Part of the positive commodity price action was attributable to more positive manufacturing news. The latest report from the Institute for Supply Management showed manufacturing activity made its largest jump since 2004. The increase was driven by significant growth in new orders and production. Almost all manufacturing sectors screened in the report showed a jump in activity, echoing the vigor we are witnessing in the domestic textile sector. While the rise in this basket-price of commodities did little to boost prices last week for crops that compete with cotton for southern acres—particularly corn, wheat, and soybeans—the increase cemented sentiment that cotton will reclaim a large swath of acres lost to other crops over the last two years.

Closer to home, two key indicators helped propel cotton prices higher on the week. First, weekly export sales were surprisingly good with a total of 279,000 bales in new sales recorded. Shipments were also excellent at 301,500 bales. Also, rumors are spreading that China—the world’s largest cotton importer—is likely to increase its import quota again in coming weeks, boosting prospects for additional shipments before the end of the marketing year. This evidence prompted us to revise our U.S. export forecast higher than the USDA here, friendly to higher prices. A second key indicator is the recent surge in unfixed call sales. At 70,424 contracts, the volume in unfixed call sales is the highest in over two years, helping weekly cotton futures rebound to one of the highest closes in over two years.

As the marketing year winds down, trading in coming days is less likely to be influenced by the next USDA WASDE report due Friday and more likely to be driven by weather developments. We look for April’s WASDE to show modestly tighter fundamentals in the U.S., mostly due to higher U.S. exports this marketing year. But small adjustments to old-crop fundamentals also are likely to become more of a non-issue in coming weeks, as the market’s attention turns to the size of spring plantings in the northern hemisphere and weather conditions after germination.