Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

After beginning last week on a sour note, cotton futures on the ICE Futures U.S. rallied impressively in the second half of the week to finish at the highest close in over a month on sentiment of fading near-term supplies. The market sank Monday and Tuesday as traders took their cues from the weather and from a bearish shift in the latest spec/hedge report. Futures retreated a combined 218 points over these two days, with the most-traded December contract briefly touching 72.96 cents per pound during Tuesday trading, the lowest level in almost five months.

Near-ideal weather across West Texas weighed heavily on the market early in the week. Speculation is mounting that if weather remains favorable, cotton yields and production could expand much higher this season than originally thought. Anecdotally, many Texas producers report the best-looking crop in years. In its latest report on the shape of the Texas crop, the National Agricultural Statistics Service reported 74% of the state’s cotton was in good or excellent condition, the highest share for this same week in more than a quarter century of recordkeeping. What’s more, this share is up three percentage points from the previous week and eighteen points from just three weeks ago, suggesting that crop conditions—and prospects for higher yields—continue to improve with each passing week in the nation’s largest cotton-producing state.

Early in the week the latest spec/hedge report from the ICE exchange added to the bearish view. The report confirmed specs had turned net short for the first time in thirteen months, weighing further on the market. Specs are now net short 2.3% versus 1.9% net long the previous week. The net spec short position is 3,724 or 2.3% of total open interest, the most in seventeen months. After trending closely with the December contract for about a year and a half, the gradual erosion in net longs over the last two months confirms specs are increasingly disillusioned with the long side of the market, helping drag December lower.



But by Wednesday, market sentiment had turned more bullish, as traders turned their attention to the plummeting volume of certificated stocks still on hand in the U.S. By the end of the week, the volume of cert stocks deliverable against ICE futures contracts had fallen to 55,389 bales, the lowest in five and a half years. From a seasonal peak of 1.08 million hardly a month and a half ago, stocks are down more than a million bales, introducing a bit of panic buying into the market by late in the week. Dwindling exchange stocks are making commercial traders increasingly anxious that new-crop supplies may not replenish the current dearth of supplies by the time they need to take delivery, prompting the buying. From Tuesday’s low, December rebounded the next three days, rising a combined 233 points to 75.34 cents, the highest close in three weeks.

Looking ahead, the diverging trends between a net short spec/hedge report and dangerously low cert stocks are unlikely to be resolved soon, suggesting the market may see bigger-than-normal volatility in the near term. But longer term, once new-crop supplies begin to reach the market this fall, a rebound in certificated stocks to more normal levels may begin to weigh on the market. Should weather remain conducive for yields across much of West Texas, any renewed upswing in prices that began last week may prove difficult to sustain.

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

The most-traded December contract fell for the fourth straight week last week, finishing Friday at 73.96 cents per pound, the lowest weekly close in five months. In the U.S., weather typically is the biggest influence on cotton trading at this point in the year, and this season is no exception. The sentiment that a ‘big crop is getting bigger’ is commonly held across the Belt. Already, at 18.3 million bales, the latest forecasted harvest size from the USDA reflects a robust upswing in estimated cotton plantings from estimates just a few months ago and higher projections for yield. Even so, this higher target still may prove too low, given the increasingly optimistic view for the Texas crop here. While cotton across the southeastern U.S. struggled under near-record heat in June here, west Texas cotton received welcome showers that could be just what the crop there needs to rival record yields. The latest trend of daily prices for the October and December contracts reflects this view of a ‘big crop getting bigger’. Instead of the normal contango in the market, December presently is trading for 600 points less than October, suggesting the market expects a much-larger crop once the harvest is completed after the expiration of the October contract.


With roughly two-thirds of the global cotton crop grown in the northern hemisphere, summer weather is a driving force for cotton markets around the world at this point in the crop cycle. In China, home to the world’s largest cotton harvest, in spite of springtime planting delays, the crop is likely to surpass last year’s size, rising to roughly 33.0 million bales. In fact, the latest forecast from China’s National Cotton Market Monitoring System (NCMMS) here looks for a harvest 3.3% bigger than last year, concurring with USDA forecasts. And while the crop remains behind across much of the country, producers across China see development in recent days narrowing the gap, supporting the cautious optimism for yields and harvest size.

In India, where more land is planted to cotton than any other country, a lackluster monsoon has yet to crimp prospects for a record crop. While last week’s report from India’s Meteorology Department here suggests season-to-date rainfall is 13% below normal, no major damage has been reported to the crop yet. In fact, analysts believe that even if the monsoon remains similarly below normal for the rest of this season, the crop could still develop well, as long as rains are well distributed. So far this season, central and northeastern states remain relatively drier, while the southern half of the country has seen an abundance of showers. Should widespread showers pick up in coming weeks, Indian production could rise to a record 25.0 million bales on the strength of record plantings and higher yields, also helping to throttle back global prices in the new marketing year. But if the optimism begins to fade both in China from persistent crop delays and in India from uneven, scant monsoon rains, anticipated tight global stocks in the new marketing year could push average prices higher in 2010/11, no matter how big the west Texas crop may be.

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

After shedding roughly 350 points during the previous two weeks, trading on the ICE exchange during the holiday-shortened week turned ugly, as the technical picture eroded further and bearish fundamental news justified the recent plunge. For the week, the most-traded December contract lost another 54 points, the third straight week of contraction. At just 74.99 cents, Friday’s finish marks the lowest weekly close for the contract since March. In fact, the weekly loss would have been more pronounced, had prices Friday not rebounded 100 points, partially offsetting lower closes seven of the last eight sessions.

After decaying over the last several days, the technical outlook for the market may be suggesting a shift into a near-term sideways channel for prices. First, Friday’s high completed a perfect retracement to the breaking of trend around 75.40. Major moving averages are still crossing down and should keep trend-system selling over the market. The 20-day moving average crossing down and under the 40-day moving average is not to be taken lightly, especially after being above the 40-day for the last four months. But we also point to the Relative Strength Index for signs the market may ease its losses, at least for now. After drifting between warning points of 30 and 70 over most of the last five months, the 14-day tracker for December on the RSI breached 30, hinting at oversold conditions in the market. Since it would only take a few days of consolidation for the RSI to rebound before the market could again head lower, we expect more sideways to higher price action in the next few days, followed by another move to new lows.

Fundamentally, the plunge in prices over recent weeks reflected market sentiment for a much larger U.S. crop. The USDA confirmed this sentiment with the release of its latest production forecast here, anticipating the domestic harvest will jump 1.7 million bales from last month’s forecast to 18.3 million bales, the biggest crop in three years. While we have long expected a likely jump in production this fall and witnessed weather conducive for yields across much of Texas here, this increase surpassed all estimates from a recent survey of analysts, justifying the recent slide in prices.

Regardless, demand continues to support the outlook for prices in the long term. While the production forecast in the July WASDE report jumped beyond expectations, global mill demand is still likely to outpace the world harvest size for the fifth straight year, resulting in the lowest ending stocks in years, albeit not as low as earlier anticipated. As a result, while prices may ease lower in coming months on the outlook for an even larger crop, they are likely to remain well above their long-term average, reinforcing the need for market participants to utilize a comprehensive risk management program. To discuss how FCStone Fibers & Textiles can help you with this critical issue, click here to contact FCStone's team of risk management consultants.

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

Cotton retreated further on the week, with nearby prices closing lower four of the last five trading days, finishing the week at 77.83 cents per pound, its lowest daily close in four weeks. The weakness came both from the supply and demand sides, attributable both to a bigger U.S. crop and to worries about the economic outlook in several key markets around the world, notably Europe, the U.S., and China. On the supply side, the market sank this week on learning of a bigger-than-expected plantings estimate from the USDA. The government’s acreage forecast here implies a bigger-than-expected domestic harvest this fall, given a bigger-than-expected increase in cotton plantings this spring. At 10.909 million acres, total cotton plantings are expected to be up 19.2% from last year’s 9.149 million acres, the biggest percent jump in fifteen years.

On the demand side, debt financing and credit concerns remain a drag on European markets, threatening to spread across the continent and afflict other countries around the globe. These concerns are weighing on consumer confidence in several European markets, sapping shoppers’ enthusiasm to spend. In particular, European sales of textiles, clothing, and footwear—widely viewed as discretionary, non-essential purchases—sank -0.4% in April from a year earlier, offsetting four straight months of gains. Naturally, slipping sales in this category bode poorly for global demand for cotton.

Also, the outlook for the U.S. economy dimmed in the last week, further weighing on prospects for global cotton demand. From consumer confidence to factory orders to payrolls, several indicators sank in recent days, suggesting at best a slower rebound in economic activity, and at worst an increased likelihood of a double-dip recession. After reporting three consecutive monthly increases in consumer confidence, the Conference Board reported a much steeper-than-expected drop in consumer confidence in June. The organization’s index of consumer confidence fell to 52.9 in June from a downwardly revised 62.7 in May. Adding to the negative tone, a barometer of business activity pointed to contraction in May. After reporting eight consecutive monthly increases in new orders for manufactured goods, the Commerce Department released a report Friday showing that factory orders fell much more than expected in May. Factory orders fell 1.4% in May, more than twice as big a drop as analysts were expecting. Finally, the week concluded with a thud on the release of the latest employment data. Non-farm payrolls fell by 125,000 jobs in June, the first drop in seven months. While most of the plunge was due to the steep drop in the number of temporary workers for the census, the loss still outpaced forecasts by market watchers. Given the weaker tone of recent economic news, it comes as little surprise that cotton prices—which are typically well-correlated to economic activity—plunged again last week.

Lastly, the news from China last week also cast a pall over the cotton market. Even though China’s National Bureau of Statistics revised 2009 GDP growth across the country to 9.1% from its earlier estimate of 8.7%, signals point to mounting concern that growth may slow this year. Growth in auto sales slowed in June as the government acted to tighten credit in order to control inflation and cool the economy. Similarly, the government is reigning in speculation in the housing market, in hopes of containing inflationary pressures, but is also inadvertently hindering employment in housing-related professions. Foreshadowing slower growth in the economy, the Shanghai composite index recently fell to a fifteen-month low. Should slower economic growth take root in this market, it could hinder prospects for rapid growth in retail demand for cotton products in one of the most promising growth markets in the world.

While we still point to the longer-term bullish fundamentals inherent in the market, the shorter-term technicals have eroded rapidly in recent days. Price is now just above major support in the form of the 200-day moving average and the bull trendline going back to the March 2009 lows. Short-term moving averages (nine- and ten-day averages) are crossing down and under the medium- and longer-term averages. Last week also saw December plunge through support at 50% and 61.8% retracement points, closing lower for six straight sessions. Friday’s close cast a negative light on the weekly chart, confirming the “toppy” price action of the previous two weeks. Looking ahead, prices this week will take their cue from Friday’s next WASDE report and sentiment behind a recently weaker dollar. Also, coming days promise to be critical to the technical outlook as the weekly December chart approaches long-term support in its sixteen-month up-trend channel.