Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

The cotton market continues to plumb new lows, weighed down by a soaring dollar, weaker equity markets, and the forward roll of positions by funds. Nearby cotton prices tumbled lower for the ninth straight session Friday, finishing the week at 77.06 cents per pound, the lowest daily close in almost four months. For the holiday-shortened week, Nearby prices gave up 299 points. Every contract month retreated last week, with several falling to the lowest levels in months. Different technical indicators are calling for a rebound, with momentum oscillators and the Relative Strength Index moving into oversold territory.

A key issue that continues to hinder prices in the broader commodity market is the relative strength of the dollar. The euro continues to get pounded on debt worries spreading across the continent. Europe's shared currency finished the week below $1.20 for the first time in four years, following bleak economic statements late in the week from Hungary. This drove U.S. Dollar Index futures to a fifteen-month high of 88.315, hammering commodity prices. Reflecting this weakness, the Reuters/CRB Index has collapsed over the last month, and at 248.94 is flirting with a new nine-month low. As a result, despite the most bullish old-crop fundamentals in years, cotton prices are pulled lower by weakness in commodity prices brought on by a re-strengthening dollar.

A second issue weighing on cotton prices is weakness in another key asset class, equities. Dow Jones Industrial Average futures finished the week below 10,000 for only the second time this year, dragging cotton prices lower. As the graph below shows, for the last year and a half, there has been a strong correlation between cotton prices and the Dow. But after weakening earlier this year, the co-movement has broken down during the last month, as stock prices retreated relatively faster in response to fears of a stalling global recovery.



A last issue that has hindered prices in recent days has been the roll forward of positions by funds. Long liquidation is accompanying this rolling of positions, reflected in the narrowing of the July/December inversion. After weighing on the market all year, this backwardation narrowed last week to just 165 points. The steep descent in nearby months has facilitated additional sales of certificated stocks as first notice day approaches for July. While the bears clearly have ruled trading in recent weeks, weather and its impact on crop development will dictate price with a more vocal voice for the market over the next several weeks.