Last week saw ICE cotton futures jump to their highest weekly close in two months, propelled in part by a weaker dollar and tentative prospects of improving downstream demand. Nearby futures leapt 389 points for the week to settle Friday at 93.52 cents/pound, the biggest weekly advance since the start of the year. While futures sagged only modestly Thursday and Friday, this softness did snap a streak of six gradually higher closes for the market.
Some of last week’s firmer prices rested on more signs pointing to pockets of improving demand across the global textile supply chain. While the market remains a long way from shaking off the full impact of the global destruction of demand that has gripped the supply chain the last few years, green shoots of improving demand suggest a return to modest growth may be close at hand. Most recently, Chinese cotton yarn imports benefitted from higher demand and lower unit costs to expand to a record high in February. Also last week came improving indicators of faster growth in 2012 retail demand for the largest markets in both Europe and Latin America. If these signals take root and spread, global mill demand for cotton may rebound in 2012 as well. Additionally, weekly U.S. cotton exports continue to outpace the average volume needed to reach the USDA’s forecast of 11.0 million bales, suggesting this target may be revised higher soon. Traders’ positions reflect this creeping optimism, as the weekly CFTC report showed Managed Money went from a net short position of over 10,000 contracts the previous week to a net short of just 948 contracts as of last Tuesday.
But partially offsetting some of this enthusiasm is a handful of bearish indicators. First, after touching a seven-week high Wednesday, futures retreated Thursday and Friday, in part owing to a bigger-than-expected Prospective Plantings report from the USDA. The area sown to cotton in the U.S. this spring is expected to reach 13.2 million acres. While this area is 11% less than last year, it is more acreage than many expected, hinting the harvest size may be somewhat bigger than first anticipated, assuming trend yields and abandonment. Additionally, while there are glimmers of hope for Thailand’s beleaguered fiber and textile supply chain later this year, the industry continues to reel from dull demand and last year’s record flooding. And other disappointing signs hint the Spanish apparel market—one of the five biggest in Europe—may go from bad to worse later this year. But perhaps the biggest weight to loom over the market may be the recent suspension of China’s cotton reserve procurement program. This effort effectively propped up Chinese—and by extension, global—cotton prices over recent months. But with no more procurement until the new harvest arrives, the near-record divergence between Chinese and foreign cotton prices may narrow, perhaps with Chinese prices easing to close the gap. Following Wednesday’s near-term high, cotton prices have stalled and there is little sign that demand is rising to meet the market. In fact, commercial traders report little inquiry in the aftermath of the recent rally. The fallout of no more Chinese Reserve purchases may color the market until more attention turns to weather developments as Northern Hemisphere plantings soon commence in earnest.
