Weekly Commodity Market Recap: Cotton

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Last week cotton enjoyed one of its best performances in months, as nearby prices rose to a five-week high on heightened concerns of diminishing near-term supplies and in response to a weaker dollar. In fact, every contract month closed up for the week on an improving technical and fundamental outlook, reaching multi-week highs. The October contract finished the week—and the marketing year—at 82.36 cents per pound, a 22-month high. December similarly fared well, closing higher seven of the last eight sessions before settling at 78.76 Friday afternoon, its highest daily finish in over a month.

First, the sinking value of the dollar is helping prop up a broad range of commodities, including cotton. After reaching a near-term high earlier in June, the U.S. Dollar Index—a measure of the value of the greenback relative to a basket of foreign currencies—gradually eroded, falling to 81.655 late last week, the lowest in over three months. The dollar tumbled to a new year-to-date low versus its Japanese cousin, and teeters on the verge of falling to the lowest level against the yen in fifteen years. And at 1.305, the dollar also is trading near a two and a half month low against the euro, as signs of a relatively faster rebound in Europe take hold. Should the dollar remain depressed, this is likely to support a host of commodity prices later this summer, including cotton.

Second, Traders are fretting over the very real possibility that few old-crop supplies will be available for near-term shipment before ample new-crop supplies enter the market in a few months. Certificated stocks withered further, easing to just 47,365 bales by the end of the marketing year last week, the lowest since 2004. Any late-harvested U.S. cotton is not eligible for delivery in December—one of the two most traded contracts—creating ample fear that cotton supplies available for December delivery will be extremely limited. Thus, merchants are loath to hedge against December unless they can deliver. As a result, the lingering backwardation between the October and December contracts caused by views on old-crop/new-crop supplies has spilled over into the December/July spread. While the relatively modest Dec/July inversion is not—yet—a harbinger of bearish days ahead in its own right, it may bear attention if the inversion persists and widens appreciably as December approaches expiration.