Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

Buffeted by less-than-favorable headwinds from outside markets, cotton prices were little changed on the week but still managed to fare better than most commodities, hinting at the underlying strong fundamentals internal to the cotton market that are likely to persist into the coming marketing year. Nearby cotton futures finished the week up a modest one point to 80.72 cents per pound from the week before, trading inside the prior week’s range. But this seemingly dull activity masks the impressive behind-the-scenes narrowing of the spread between July and December. After reaching a difference of 895 points hardly three weeks ago, the backwardation between these contracts stands at just 345 points now, as prices on both contracts have converged.

Cotton has taken its cues recently from both internal and external influences, particularly the re-strengthening of the dollar and the outlook for cotton fundamentals in the new marketing year. Naturally, many markets around the world are hanging on the latest developments emanating from the European debt crisis. The difficulties impacting Greece threaten to drag other euro-bloc members into the morass, weighing on investor and consumer confidence and lowering the value of the area’s currency. As a result, the euro fell to its lowest level in more than four years, helping push its American cousin higher. At 86.231, the U.S. Dollar Index rose to its highest level in a year, crimping prices for a number of dollar-denominated commodities traded globally. Oil prices retreated to a fourteen-week low of $71.61 per barrel, while the Reuters/CRB Index collapsed to 258.55, matching its lowest level in seven months. By comparison, cotton managed to fare relatively well in this environment against a broad mix of commodities.

A reason behind this relatively better performance from cotton may be due to the latest USDA WASDE report, which provides a first peek into projected market fundamentals for the new marketing year. The USDA looks for global cotton production to rebound an impressive 10.7% in 2010/11, but still trail the volume of global cotton mill demand for the fifth straight year. World cotton use is likely to expand to more than 119 million bales, the third-highest volume on record. As a result, the USDA anticipates global ending stocks will decline even further in 2010/11, tightening the world stocks-to-use ratio to the lowest level since 1994/95, a year when prices soared to more than a dollar per pound. While these tighter fundamentals are not enough evidence to conclude prices will climb even further in the coming marketing year, they do strongly imply that the market is unlikely to see prices settle closer to their ten-year average of just 55 cents per pound. While our short-term bias may be lower, tightness in cotton and yarn markets is acute in many markets around the world, supporting our long-term bullish slant that cotton prices are unlikely to retreat dramatically in coming months.

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

Cotton futures retreated for the second straight week last week, erasing all of April’s gains as outside influences drove the dollar higher, roiled equity markets, and pressured most commodities lower. Nearby cotton prices fell 342 points, or -4.1% on the week to 80.71 cents per pound, burdened primarily by a soaring dollar. Last week’s strength in the greenback is a bit of a misnomer, with the true issue being relatively more weakness in the euro from default fears emanating from Greece. The euro plunged to as low as $1.26 last week—a fourteen-month low—amid concern that Greece’s debt issues could lead to a much-worse contagion across Europe, crippling the tentative recovery on the continent. Naturally, this propelled the dollar higher, with the U.S. Dollar Index breaching 85.0, its highest level in over a year. Naturally, the dollar’s rise caused massive unwinding of long commodity trades, including cotton.

These jitters spilled over into equity markets, sending stocks on a wild roller coaster week of trading with commodity markets paying close heed. The Dow Jones Industrial Average shed almost 800 points on the week—its biggest plunge in years—as investors unloaded risk amid this week's chaotic experience in the markets. Euro-zone debt issues coupled with Thursday’s unprecedented—if ‘accidental’—intraday U.S. stock market plunge of almost 1,000 points left investors in no mood for additional risk exposure in equities or commodities, with many flocking to the relatively safe havens of gold and the dollar.

This ‘flight to safety’ drove prices for many commodities lower, dragging cotton prices down in step. The nineteen-commodity Reuters/Jefferies CRB index plunged nearly 6%, the biggest weekly fall since 2008. All major components of the Index except livestock posted steep losses on the week, reflecting the broad-based risk aversion. Regardless of any internal fundamental drivers impacting the cotton market last week, cotton was swept up in the broader-market decline.

Looking ahead, the coming week holds the potential for a rebound for cotton. The market’s first peek at new-crop fundamentals from the USDA Tuesday is likely to suggest continued tightness in the balance sheet, if somewhat looser than this marketing year. Analysts’ forecasts—including our own here—point to a larger crop size in 2010/11, but an offsetting jump in demand for U.S. cotton as well. Also, anecdotal evidence indicates that last week’s swoon in prices prompted Chinese mills to become active buyers, suggesting robust export sales are forthcoming. And the weekend announcement of a Greek rescue package worth almost $1 trillion from the EU is likely to assuage fears of an imminent default, lifting spirits and easing risk aversion somewhat. This news could partially offset last week’s decline in the euro and prompt a modest rebound in commodities in coming days, including cotton.

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

After reaching the highest levels in over two years the previous week, overbought cotton futures retreated last week, easing lower each of the first four days before rebounding modestly Friday as traders covered shorts and mills bought at these relatively lower prices. Nearby prices sank 207 points on the week to 84.13 cents per pound, easing in sympathy with a broad swath of commodities as the dollar re-strengthened. Brought on by Greek debt woes that threaten to spread across the European continent, the euro plunged last week, helping boost the dollar to 81.991 Friday, the highest weekly close in over a year. In turn, the higher dollar drove many commodity prices lower, including cotton. Lower unfixed call sales again last week foreshadowed the dip in futures prices. Even so, the CFTC Cotton On-Call position report shows a growing mass of mill buying under the market. Now at 2.6 million bales, the unfixed mill position should help support prices on any speculative related sell-off. The spec long position, which is much larger than the mill short position, has the advantage being able to roll forward. Mills must buy because they need the cotton, and most merchants would be unwilling to roll their contracts forward. It could be an interesting summer even if the weather cooperates.

By late in the week the dip in prices brought new business back to the market, boosted by continued signs of economic growth. The Commerce Department reported first quarter GDP rose an annualized 3.2%, the third consecutive quarter of expansion. What’s more, consumer spending led the growth, hinting at improving demand for cotton textiles and apparel in the world’s largest retail market. While evidence here confirms the recession had a devastating effect on per capita end use of cotton products in the U.S., a rising economic tide is likely to lift all ships, boosting fiber demand in 2010. A lackluster housing market and above-trend unemployment are likely to remain drags on net apparent consumption of cotton, but continued economic growth is likely to offset these negative forces, expanding cotton demand this year.

Away from the demand side, in the shorter term weather will become the dominant factor driving cotton prices, as reports of crop development and condition around the world weigh on the market. After a month of below-normal precipitation, Mato Grosso cotton in Brazil is in need of a good drenching before picking commences in earnest in coming weeks, else yields and production could suffer. Meanwhile, the Australian cotton harvest continues under clear skies and normal temperatures, boosting yield and quality prospects. With abundant year-to-date moisture levels here, tentative sentiment for higher yields in West Texas is widespread, while concern is mounting across the Southern Delta over too little rainfall. Given the persistent inversion in price between nearby contracts and more distant contracts, the market has long been hinting at a larger autumn harvest and increasing supplies for months. The question is whether—and how soon—this convergence in price between contract months happens as prices for more distant months firm, or if Nearby prices ease lower on signals of stumbling demand. Presently, we are not confident that either event will happen soon, suggesting this backwardation in the market may persist.