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.