Dirt to Shirt

FCStone Annual Outlook Conference: June 15-16, 2011

2011-05-12T07:57:00.000-04:00

The 2011 INTL FCStone Outlook Conference focuses on examining supply and demand factors in uencing every major food-related commodity, as well as price in uencers such as interest rates, energy, currencies, governmental legislation and regulations, and global weather patterns.

This year's theme is "The Most Important Subject on Earth," an acknowledgment of the critical importance of food, at a time when political and economic disruptions, rising energy prices and controversial new technologies are bringing food supply and demand issues to the forefront of
the global agenda.

The continuing turmoil in the Middle East — exacerbated at least in part, according to many commentators, by food shortages and rising food prices in the region — will be addressed by the conference's keynote speaker, Shahar Arieli, Deputy Consul General of Israel to the Midwest.
His keynote address will help conference attendees understand what's happening in the region, and how various scenarios are likely to a ect food and energy prices in the months and years ahead.

Representatives from major U.S. and European exchanges will discuss new developments in global risk management tools. The influential market analyst David Hightower, publisher of The Hightower Report, will present his global financial outlook. Hightower, who has been a market analyst for more than a quarter century, is a frequent guest on CNN and Bloomberg TV. David Oppedahl, an economist for the Federal Reserve Bank of Chicago, also will offer a macroeconomic perspective on the U.S. and global economies.

For the full agenda or to register to attend, click here for more: http://www.intlfcstone.com/seminars/outlook/Pages/default.aspx

Weekly Commodity Market Recap: Cotton

2010-10-25T10:46:00.004-04:00

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The ‘ascent’ portion of cotton’s roller-coaster ride continued last week, with a weak dollar and global supply concerns driving the market higher. While trading on the ICE Futures U.S. was constrained to an inside weekly range, nearby December prices still jumped 984 points from last week’s finish to 119.71 cents/lb by Friday afternoon, the highest weekly close in 140 years. This latest advance marks the thirteenth higher weekly close in the last sixteen weeks. Not since another supply constraint—a northern blockade of southern commerce during the American Civil War in the 1860s—have cotton prices been as high.

Issues driving the market last week primarily came from developments in China and the U.S., together accounting for about two-fifths of global cotton production. In China, an unexpected bump in interest rates—the first since 2007—sent traders scrambling. The action could hinder textile exports from the world’s largest textile producer and help curb excessive speculation in some markets. While this bearish news normally would be likely to exert some pressure on domestic prices, fundamental support remains intact and local cotton prices are still on the rise. On balance, late-week declines in the dollar overshadowed its Tuesday rebound from the interest rate move, pulling the greenback even lower and boosting prices for a range of commodities—including cotton—even higher.

Across China, new weather concerns discussed here are dimming producers’ sentiment for yield, production, and quality across much of the country. Parts of Anhui, Shaanxi, and Xinjiang reported either cooler or wetter conditions over the last week, unwelcome news for the world’s largest cotton producer. What’s more, this weekend a new northern cold front plowed south across unpicked cotton in China, bringing more strong winds, colder temperatures, and unwelcome rains to much of China. The country’s main meteorological agency is calling for temperatures to plunge 14-16 °C shortly in Hebei, Shandong, and Jiangsu, slowing harvesting and hurting fiber quality. Already, key forecasting organizations are paring back their projections—again—for the size of this year’s China harvest.

By Friday, the market soared limit up on news of heavy overnight rain and hail across the Texas High Plains discussed here. Almost four inches of rain Thursday evening pounded fields full of beautiful pre-sold cotton, suggesting yield losses and discoloration may be in the offing for the local crop. With bolls open on virtually all the state’s cotton but the Texas harvest only one-quarter complete, the timing could not have been worse. While damage estimates are premature right now, early guesses figure 50,000 to 100,000 bales may have been lost.

The same old approach for spinning mills of buying on-call and hoping for a pullback is going wrong in the worst of ways. Conditioned by years of oversupply, temporary price spikes, and virtually no risk management, spinners outside China have been caught unprepared for the great bull market of 2010 as the balance sheet continues to tighten. While there is grumbling in the mill community about idling spindles rather than running such expensive cotton, there still is scant evidence that demand is ebbing. After the market recovered so quickly from last week’s sell-off, we see little to stop it from making new highs in the coming week. To learn more about how we can help you better manage this exposure with a comprehensive risk management strategy to protect against the market’s peaks and swoons, please click here.

Weekly Commodity Market Recap: Cotton

2010-10-18T11:11:00.006-04:00

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Cotton saw one of its most volatile periods on record last week, driven by a rush of panic buying and then panic selling as futures soared to unprecedented heights, only to tumble limit-down late in the week. Those two old market movers—fear and greed—clearly were in play last week, only on different days, it would seem. Cotton traded to new highs three different days, only to see its biggest collapse—and widest one-day range—in years by Friday. On balance, for the week the market touched record-high prices, ranged over 1,255 points, and covered an unheard-of 993 points on Friday alone.

Trading on the ICE Futures U.S. began the week with a bang, soaring limit-up on news that India had suspended registrations of cotton for export this year, only ten days after opening the registration period. Indian traders had already registered the government’s maximum of 5.5 million bales, reflecting not only soaring foreign demand but locals’ concern that the government may hinder cotton exports again in coming months.

Following Tuesday’s consolidation and an inside day Wednesday, the market was poised for another climb and test of its all-time record high Thursday. A confluence of several factors around the world helped propel U.S. cotton futures dramatically higher this day. First, cotton on China’s Zhengzhou Commodity Exchange closed limit-up on near-record open interest, following news of mills’ unusually low cotton inventories across the country. Next, news from India further fueled this bullish fire. The country’s textile sector redoubled its calls to the government to postpone cotton exports until 2011, to the panicked dismay of importing mills across Asia. Also, disappointing economic reports in the U.S. paved the way for further quantitative easing by the Fed, dragging the dollar lower and pushing commodities higher. As a result, all 2010/11 contracts closed limit-up again. Synthetic prices for December closed at 118.87 cents/lb, setting a record high in the 140-year history of the exchange.

After gapping higher on follow-though trading, the bulls lost their appetite in early Friday action and the bears ruled the day. From the intra-day high of 119.80 cents/lb—a record—the market plummeted an astounding 993 points to settle limit down at 109.87, crashing -8.3%, the largest non-synthetic daily range ever.

In spite of Friday’s tumble, cotton futures still managed to rise for the week, up for the twelfth time in the last fifteen weeks. Several factors support this string of gains to the highest weekly close in fifteen years. Unfixed call sales stand at a record level here, and many spinners still need to buy December to fix their on-call purchases. Surging U.S. export commitments detailed here remain on a record pace, despite a modest start to shipments this marketing year. And suspicions are rising here of disappointing yields in China, hinting at more imports in coming months. Not to mention, the impact from a weaker dollar and bullish specs and funds cannot be overstated. With little fundamental history to suggest a price range for the market and constrain these volatile swings, it appears these wild fluctuations may persist, reflecting the need for a comprehensive risk management strategy to protect against the market’s peaks and swoons. To learn more about how we can help you manage this risk, please click here.

Weekly Commodity Market Recap: Cotton

2010-10-11T11:49:00.005-04:00

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Cotton rebounded impressively last week on the ICE Futures U.S., buoyed by a converging swell of different factors that lifted the market to the highest levels in years. Nearby December futures soared 915 points on the week to close Friday at 107.17 cents per pound, the highest close in more than fifteen years. The market has risen eleven of the last fourteen weeks, tacking on 37.7% in less than three and a half months, one of the steepest and biggest gains ever recorded. Every contract enjoyed the upswing last week, with several climbing to life-of-contract highs Friday. From China’s return from holiday to India’s soaring export registrations to tighter fundamentals to a weaker dollar, several issues were at play to boost cotton prices last week.

First, the siren song of soaring spot and forward markets in China helped propel global cotton prices higher. After returning from the week-long National Day holidays, Chinese traders wasted little time in driving cotton prices on the Zhengzhou Commodity Exchange limit-up late in the week. While harvest weather was favorably dry across much of the country during the break, picking remains behind schedule and mills’ appetite for the fiber remained voracious, in spite of even higher prices. Accordingly, traders were in no mood to be caught short, particularly given the rebound in ICE prices during the holiday. Every ZCE cotton contract soared late in the week with most reaching life-of-contract highs, and China’s CNCE closed limit-up two sessions in a row, helping justify the gains on the ICE.

Next, an impressive—and largely unanticipated—surge in cotton registrations in India threatens to cap this outlet for forthcoming exports, and may fan the protectionist flames further against additional shipments abroad, driving prices higher. The Indian government’s window for shippers and merchants to register new exports for later shipment is slamming shut just ten days after first opening. Since October 1st, traders already applied for export permits totaling 5.5 million bales, equaling the government’s entire export allocation for the marketing year imposed here. The surge reflects both desperately low inventories in mills across Asia and traders trying to ship as much cotton as possible, as soon as possible, both before the tax-free limit of 5.5 million bales is reached and in case the government restricts exports again. While we demonstrated here that the harvest will easily surpass domestic mills’ needs for the eighth straight year, we do not look for the government to ignore the demands from the local textile industry and raise cotton export limits soon. As we showed here, despite its best of intentions, the government’s meddling in open-market cotton trade to contain domestic prices is backfiring and helping propel both Indian and global cotton prices higher.

Additionally, the USDA added further fuel to the bullish fire in its latest WASDE report. The October balance sheet released late last week here pointed to tighter global fundamentals than earlier anticipated, helping strengthen prices further. In particular, world ending stocks were revised lower from last month’s 45.4 million-bale forecast to 44.7 million. The biggest changes came in China, where anticipated production fell one million bales to 31.5 million. Chinese beginning and ending stocks shrank and forecasted imports climbed. As a result, the world stocks-to-use ratio declined even further from last month’s 37.7% to 37.0%, the lowest in sixteen years, concurring with the highest year-to-date average prices also in sixteen years.

Finally, outside the world of cotton, the U.S. dollar continues to plumb new depths, helping to boost prices for a range of export commodities. The U.S. dollar index fell for the fourth straight week as monetary policy remains exceedingly loose, settling at 77.563 Friday, its lowest close in almost nine months. Friday’s less-than-stellar U.S. employment report exacerbated worries over the U.S. economy. And following the weekend IMF summit that failed to ease tensions over a festering international ‘currency war’, the Federal Reserve is set to provide additional stimuli to the sagging economy, which is likely to weigh on the dollar and boost commodity prices even further.

Weekly Commodity Market Recap: Cotton

2010-10-04T10:21:00.006-04:00

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In anticipation of the USDA’s next release in coming days of the latest U.S. cotton supply and demand projections for new-crop cotton, FCStone prepared forecasts and commentary on how these projections may change from recent months:

U.S. production for 2010-2011: Down 300,000 bales to 18.5 million bales. While yields are still likely to be well above last year, crop conditions generally have eased gradually over the last two months across much of the cotton belt, suggesting yields may not be as robust as earlier anticipated. While this trend is happening in several states, we are keeping a close eye on Texas and the Carolinas. Here, the northeastern corner of the cotton belt received well over eight inches of rain last week, drenching open-boll cotton and fading harvest prospects. Also, the condition of the Texas crop still in the field has eroded to the lowest since June, dimming earlier optimism somewhat.

U.S. Exports: Up for the fourth straight month, rising from 15.5 million to 15.7 million bales. Already, early-season commitments stand at a record 8.9 million running bales, hinting at robust exports later this marketing year. Adverse pre-harvest weather in several cotton-growing areas of China was unwelcome and may hinder production and quality, suggesting the world’s largest importer may need to import even more fiber in 2010/11, with much of that coming from the U.S. What’s more, delayed exports from India discussed here also could bode well for shippers in the U.S. and Australia this marketing year.

U.S. Ending Stocks: With a likely smaller anticipated supply and projected demand bigger from last month, ending stock forecasts for October are likely lower by 500,000 bales from September to 2.2 million bales, the lowest level in more than five decades. Unsurprisingly, recent daily closes on The ICE here touched the highest levels in years in response. We look for the USDA to find expectations of higher demand and lower ending stocks will tighten the anticipated stocks-to-use ratio this year to closer to 14%. This would be the tightest ratio since 1994/95—the last time average prices were as high—and supportive of elevated prices well into the winter.

In spite of this increasingly tighter outlook for U.S. cotton fundamentals, we caution that any increase in U.S. prices may not be commensurate with the tightening in the balance sheet, as it has been over recent months. As the graph below demonstrates, the jump in futures prices has outpaced the tightening in the stocks-to-use ratio over the last two months. And October’s anticipated 12% ratio—while tighter than any point in years—still is not tight enough to support average September prices, let alone even higher prices in October. This extrapolation brings with it the pitfalls inherent in any extrapolation; we caution that October prices even could slide modestly lower, despite the tighter outlook for the domestic market.

While the anticipated tighter evolution of domestic fundamentals is impressive, we temper this outlook with a forecast for looser global balance sheet. In particular, we look for the Indian harvest to jump to a record size, on the strength of unprecedented yields. That having been said, it may be a few months before Indian policymakers allow new-crop shipments to resume, suggesting global exports—and world prices—may remain dear through the conclusion of harvest.

Weekly Commodity Market Recap: Cotton

2010-09-27T11:50:00.004-04:00

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Futures trading in New York firmed again last week, driving nearby prices to the highest levels in more than fifteen years as near-term supply concerns around the globe remain a dominant issue. At 99.93 cents per pound, Friday’s finish closed out the tenth weekly increase in the last twelve weeks. In fact, earlier in the week futures gapped as high as 103.55 cents before retreating lower to finish the week up 232 points. Backwardation remains endemic in every contract through 2012. The most-active December contract is up an astounding 26 cents—or more than 36%—in just two months, reflecting both a weaker dollar and concern over shorter crops and tight supplies in a number of markets.

First, the dollar continues to sink lower, boosting export-dependent commodity prices. Dollar Index futures tumbled for the fourth time in five weeks last week, crashing through support to 79.599 Friday, the lowest close in six months. Loose, accommodative monetary policies reinforced by Federal Reserve comments again last week are sure to keep the greenback under pressure for the foreseeable future, suggesting firmer cotton prices may rule for some time.

Next, crop prospects in key markets remain tilted in a more pessimistic—rather than optimistic—direction, further supporting the bulls’ position. The latest cotton assessment in the U.S. shows crop conditions are eroding from early this summer, suggesting yield prospects may fade in tandem as we suggested here. In particular, the USDA recently declared topsoil has turned “short or very short” of moisture over a large percentage of the South. Coupled with unwelcome weekend rains over open-boll cotton in much of the area, prospects for yield and quality could dim further, supportive of price.

China’s crop also remains a concern, plagued by late plantings this spring and heavy rains this fall that are delaying the harvest. Evidence here shows every key cotton-growing region in the North China Plain is seeing cumulative precipitation this season much heavier than normal. What’s more, many of these showers have fallen in recent days, when the crop needs dry days and cool nights to reach full potential. Instead, picking is delayed and the crop in the world’s largest producer could be compromised. In response, over the weekend China announced plans to expand its reserve auction by another 400,000 metric tons to 1.0 million tons, in order to ease near-term supplies for local mills. This move did little to ease panic buying, with every ZCE futures contract month surging to life-of-contract highs.

In light of these bullish indicators, the question remains how much of this sentiment is already factored into the market. While calling a top in a runaway bull market like this is a fool’s game, we take caution that any continued tightening in the fundamentals mostly may be priced into the market already. Futures may have further to climb this fall, but we remain wary of the volatility and look for any continued tightening in the fundamentals to have a more muted impact on driving prices higher.

Weekly Commodity Market Recap: Cotton

2010-09-20T12:28:00.005-04:00

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Nearby cotton futures surged last week to a fifteen-year high at 97.61 cents/lb, closing up 674 points, the second-biggest weekly leap in more than two and a half years. The latest jump extends a trend witnessed over the last six months, and especially over recent weeks. Friday’s finish closed out the ninth weekly increase in the last eleven weeks. The most-active December contract is up an astounding 25 cents in less than two months, reflecting both a weaker dollar and near-term supply concerns for the crop.

The U.S. Dollar Index retreated late in the week to its lowest since early August and soon could fall to the lowest in more than a year and a half, depending on Fed Reserve actions later this week. While the Fed isn't likely Tuesday to change its assessment of the U.S. economy or indicate a fresh round of asset purchases, there is an outside chance it could engage in a new round of stimulation, which would further weigh on the dollar and could boost export-dependent commodity prices further.

On the supply side, the market continues to fret over inclement weather impacting much of the Indian and Chinese crops. After a late start to the season, India’s monsoon is threatening to overstay its welcome. For fifteen of the last sixteen days, widespread showers across the country have outpaced daily norms, prompting speculation the harvest size may be smaller—or at least later—than forecast if monsoon rains last longer than normal. Already, the Confederation of Indian Textile Industries is calling for the government to delay cotton exports from October to January. Naturally, a postponement from the world’s second-largest exporter could drive global prices higher as importers scramble, but even the threat of more policy meddling is boosting prices.

In China, foul weather similarly is delaying the crop and may whittle back the harvest size. By late last week, only 5% of the nationwide crop was picked, well behind the 13.6% pace averaged over recent years. And cooler, rainy weather last week in key provinces did little to hasten the harvest, increasing the risk that wintry weather could compromise yields and quality in coming weeks. What’s more, daily offtake of reserve auction supplies has expanded to more than 20,000 tons each of the last eight sessions, supporting our view here that these supplies may expire before ample new-crop volumes enter the market. In response, spot and forward prices in China continued to advance. CNCE, ZCE and physical prices posted strong gains, with every ZCE cotton contract climbing to life-of-contract highs.

The tightest global fundamentals in fifteen years are supporting the highest global cotton prices also since the mid-1990s, with little opportunity for supply-side pressures to ease in the months to come. The ‘A’ Index breached $1.00 per pound recently, while Nearby prices in the U.S. also are on the cusp of closing above one dollar for the first time in years. What’s more, looking to the conclusion of the northern hemisphere harvest, crop concerns could materialize in spots other than China and India, further propelling the market higher. So while specs continue to pile into the boat for easy sailing today, it will pay to cast an eye to the horizon in 2011 for any tumultuous waterfalls ahead.

Weekly Commodity Market Recap: Cotton

2010-09-13T11:22:00.003-04:00

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The bulls extended their run on the market last week, with support from anticipated tighter fundamentals in several key countries firming the outlook. The most-traded December 2010 contract on the ICE Futures U.S. rose for the seventh time in the last eight weeks, closing Friday at 91.29 cents per pound, the highest in more than two years. Even more impressive, earlier in the week the nearby October contract closed as high as 91.32, a fifteen-year high. Perhaps more significantly, the fact that each of the next ten cotton futures contracts are backwardated all the way until December 2012 shows just how tight world stocks have become, with little relief likely until well into the new marketing year, at the earliest.

The latest USDA WASDE report released Friday morning re-confirmed this tightness in the market. In spite of a bigger harvest forecast, gains in demand projections easily outpaced higher revisions to supply, implying lower stock levels. In fact, expected exports for this marketing year jumped 500,000 bales to 15.5 million, the second-highest volume in history. As a result, the USDA pared back 2010/11 U.S. ending stocks to a scant 2.7 million bales, the lowest level in fifteen years, closely mirroring our forecast here. In turn, expanding demand and lower inventories drove September’s forecasted stocks-to-use ratio lower to just 14.1%, the lowest since the mid-1990s, concurring with the highest domestic prices since the mid-1990s.

While not as dramatic, the net result of changes in the global balance sheet echoes the tighter conditions seen in the U.S., driving world cotton prices even higher. Forecasted ending stocks for this marketing year eased lower from August to just 45.4 million bales, also tightening the projected stocks-to-use ratio to the lowest in fifteen years. Naturally, global cotton prices are up again on the outlook. Already, every forward contract on China’s Zhengzhou Commodity Exchange now stands at a life-of-contract high, and the most-distant July 2011 contract settled Monday at 19,200 yuan/ton ($1.29), a record. Similarly, the ‘A’ Index, a proxy for global cotton prices, breached $1.00 per pound Monday for the first time since 1995, trending in mirror-opposite fashion to the plunge in global fundamentals.

Looking ahead, two opposing issues cloud the medium-term forecast. First, spinners worldwide are complaining that climbing yarn prices have not been commensurate with rocketing cotton costs. Naturally, this implies even tighter margins for many yarn mills that have little margin to spare. In fact, anecdotal reports are emerging of some yarn operations idling spindles and selling their cotton inventories to capitalize on the jump in price, something unsustainable longer-term. But arguing for the bulls, excessive recent rains in key areas of China and India could dampen prospects for yield, quality, or at least timeliness of the pending harvest. While the trend remains our friend, a global textile supply chain already dealing with razor-thin margins will be in no mood to support elevated fiber costs in the long term. Nearer term, while the fundamentals do not support a sustained retracement, we would not be surprised to see prices begin to plateau as the northern hemisphere harvest commences.

Weekly Commodity Market Recap: Cotton

2010-09-07T12:02:00.009-04:00

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The cotton market remains in a world all its own, shrugging off this year’s tepid performance in the broader commodity complex and soaring to the highest levels in years. ICE cotton futures last week closed up for the eighth time in the last nine weeks, breaching 90 cents per pound to finish Friday at the highest close in fifteen years. Hints at increased Chinese demand for foreign cotton, a weaker U.S. dollar, and projected tighter domestic fundamentals are helping spur prices even higher, with little opportunity for a major retrenchment on the horizon.

First, sentiment is spreading that Chinese mills may boost cotton imports in coming months, as unseasonably cool temperatures and rain dampen prospects for crop quality and output. Already, the USDA is pegging imports into China—the world’s largest mill consumer and importer—at 12.5 million bales this marketing year, the second-highest level on record. Now, late-season precipitation on open-boll cotton in key provinces may erode harvest projections, causing mills hungry for the fiber to look abroad for supplies, adding more pressure to global prices. What’s more, evidence here suggests the government’s reserve auction supplies may be depleted by early October, before abundant new-crop supplies arrive on the market. The initial 600,000 metric-ton auction has dwindled by half over the last few weeks, hinting at a squeeze on near-term supplies in coming weeks before recently harvested cotton arrives on the market later this autumn.

Next, the weaker dollar also is helping propel cotton prices higher, auguring well for the export outlook this marketing year. The greenback continues to plumb a fifteen-year low against Japan’s yen, easing importers' cost of dollar-denominated cotton. Already, export commitments are at record highs for this point in the marketing year, with widespread demand up from several key U.S. markets. At 15.0 million bales, the USDA export target for 2010/11 is up 1.5 million bales from earlier this spring. Even so, we continue to find this forecast too conservative and look for it to climb further in coming months, boding well for higher prices.

Last, in spite of the dramatic tightening of U.S. cotton fundamentals over the last year and a half, we look for the market to tighten even further, supporting elevated prices. In our latest analysis here of how the USDA may adjust its September forecasts, we anticipate the demand side of the U.S. balance sheet may expand further, with both projected exports and mill use likely to rise. As a result, ending stocks for this marketing year may decline, pushing the stocks-to-use ratio even lower to the tightest level in fifteen years, fundamentally supporting the highest prices also in fifteen years.

What’s more, other signals support the bulls’ argument. Trend-following funds last week raised their net-long cotton futures/options position to the largest since March 2008. And the latest cotton on call position report discussed here shows record-high unfixed call sales helping drive futures higher. Amid all this bullishness, the contrarian in us points to widespread overbought technical indicators that are calling for a correction. But woe be the market watcher—or participant—that calls a top and risks being gored on a runaway bull market.

Weekly Commodity Market Recap: Cotton

2010-08-30T10:27:00.004-04:00

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Cotton futures climbed for seven of the last eight weeks to settle Friday at the highest weekly close in almost fifteen years, driven by a combination of bullish issues. Intraday nearby futures prices pierced 90 cents per pound Friday for the first time in almost two and a half years before finishing the week at 89.03 cents, the highest since September 1995. Most of the market’s support is due to supply-side concerns, ranging from the extent of damage from Pakistani flooding to drier conditions across much of the U.S. cotton belt to the record volume of on-call sales still waiting to be fixed.

First, as floodwaters begin to slowly recede across much of Pakistan, estimates of crop damage are beginning to come more into focus. While rice appears to receive the worst impact, the domestic cotton crop was inundated. Pakistan’s Ministry of Food and Agriculture estimates 15% of the harvest will be lost, reducing the cotton crop in the world’s fourth-largest producer to less than 9.2 million bales. What’s more, the Pakistan Meteorological Department still is reporting exceptionally heavy flooding in southern parts of Sindh, hinting that loss estimates could expand even further once observers get a clearer picture of the remaining crop when these floodwaters finally recede.

Anxious Pakistani mills are turning away from the flooded domestic crop to neighboring India to ensure a steady supply of cotton in coming months. As a result, Indian markets are firm with high demand and already-tight supply, propelling local prices even higher. In another flip/flop of policy, India is considering re-imposing an export quota and restrictive duty on new-crop cotton shipped abroad starting in October. Before it was removed earlier this summer here, the export duty was Rs. 2,500 per metric ton (2.4 cents/lb), but rumors are circulating that it may rise to Rs. 10,000 at the request of the domestic textile industry. These on-again, off-again restrictions are exasperating local exporters and foreign mills concerned over forward deals that have already been committed. In fact, almost 700,000 bales already are contracted to Pakistani buyers facing a big shortage in their crop caused by the worst flooding in decades, adding to mounting consternation and risk exposure for local buyers and sellers.

In the U.S., dry cotton areas in the Midsouth and parts of Texas are likely to see little chance for cool, moist relief in coming days, adding to concerns over mounting stress on the crop. As we discussed here, meteorologists look for a return of late-season heat across the eastern half of the cotton belt in September, owing to the Pacific La Niña. Combined with longer-term forecasts for drier conditions to persist across the Delta, the area is likely to stay abnormally hot and dry through harvest. Accordingly, while yields across the country still are likely to climb from last year, the outlook for the size of the crop is not as robust as just a few weeks ago, adding further bullish sentiment to the market.

A last issue that warrants attention is the influence of specs and the trade on the market. First, at 91,389 contracts, last week’s record amount of unfixed call sales implies there is an impressive volume for export waiting to fix prices on any market dips. What’s more, speculators added to their net long position again for the fourth straight week while the trade got shorter on increasing total open interest, trends that have helped buoy cotton futures over the same period. While there is no question that demand remains robust and supply concerns are mounting, we caution that when things look this bullish, it’s time to be careful.

Weekly Commodity Market Recap: Cotton

2010-08-16T11:42:00.003-04:00

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The cotton market enjoyed universal gains in forward markets last week, spurred on by the latest USDA report deemed particularly friendly to the market, but overbought technicals will make continued gains more difficult in coming days. Nearby cotton futures posted their best week since early June, soaring 309 points on the week to finish Friday at 87.49 cents per pound, the highest close in 29 months. The most-traded December contract rose for the fifteenth time in the last eighteen sessions to close Friday at 84.18, the highest in more than ten months.

A decidedly bullish WASDE report from the USDA was a key driver supporting the continued strengthening in prices. In spite of a 234,000-bale increase in the anticipated size of the U.S. harvest to 18.5 million bales, the domestic market is likely to tighten even further, owing to soaring foreign demand. Projected exports jumped 700,000 bales last week to 15.0 million, the second-highest level on record. The bigger U.S. harvest and the outlook for increased foreign demand—particularly from China—bode well for bigger exports in the new marketing year. What’s more, at almost 6.0 million bales, 2010/11 commitments early this marketing year are at a record high and up 122.9% from this point a year earlier, hinting at bigger exports in 2010/11.

Faster growth in demand offset the projected increase in production, implying lower ending stocks and tighter fundamentals. At 3.2 million bales, the anticipated level of ending stocks at the conclusion of the new 2010/11 marketing year is down 300,000 bales from just last month, tightening the stocks-to-use ratio to 17.4%. In turn, average monthly prices have gradually risen over the last year and a half as this ratio has gradually tightened, as the graph below demonstrates. What’s more, this ratio is comparable to the 2003/04 level and approaching the record lows set in 1994 and 1995, suggesting average prices this marketing year may rival the elevated average prices set fifteen years ago.

Nearer term, the outlook for continued strengthening in the market may face serious fundamental and technical headwinds that hamper price. Fundamentally, only isolated trouble spots persist for the crop as harvest nears, particularly in parts of China, Pakistan, and the southern U.S. This outlook suggests the supply-side of the balance sheet may tighten in coming months, but only modestly. Revisions on the demand side also are likely to moderate, as prospects for slower growth in several major economies stifle expansion in cotton mill use. As a result, the 2010/11 balance sheet may be hard-pressed to tighten much more than currently anticipated.

Technically, soaring prices in recent weeks hint at a coming correction. While almost all short-, medium-, and longer-term indicators turned increasingly bullish with Friday’s close, the contrarian in us cautions it may be time to take away the punch bowl, at least for now. At an eye-watering 79.3, December’s Relative Strength Index rose to its most overbought level since March 2008 Friday, several standard deviations above its long-term mean of 50, and is virtually screaming for a near-term consolidation. On balance, while the recent surge in prices is reminiscent of the March 2008 spike, we look for near-term prices to flatten out as gains taper and not mirror the plunge that followed the market’s spike 29 months ago.

Weekly Commodity Market Recap: Cotton

2010-08-09T10:50:00.002-04:00

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The persistent drumbeat of tight near-term supplies continues to drown out talk of a bigger harvest this autumn, helping drive futures higher. Nearby cotton prices extended their resurgence for the fifth straight week, climbing an impressive 204 points from the week before to finish at 84.40 cents per pound, the highest weekly close in almost four months. The most-traded December contract rose for the eleventh time in the last thirteen sessions to close Friday at 80.23, the highest in more than ten months. The near-term bulls point to withering certificated stocks and recent record flooding in Pakistan. But the longer-term bears suggest weather in key cotton-growing patches around the world will make a rebounding crop even bigger as harvest approaches.

Certificated stocks continue to plumb the lowest levels in years. At hardly more than 30,000 bales, it has been at least eight years since stocks have been this low. And without stocks, there is little chance for carry on the board. There doesn’t appear to be any prospect to begin rebuilding the stocks until harvest begins in earnest. Even then, merchants may choose to ship the cotton overseas rather than put it against the board. The earlier harvested portions of the crop in Georgia, Louisiana, Mississippi, Arkansas and Texas are already heavily committed for the December-January shipping period. This suggests much of the crop may never become certificated against the board this season, hinting at another piece of evidence supporting higher prices.

The recent deluge of rains in Pakistan is also helping support the market. The unusually heavy monsoonal precipitation is swelling rivers along the Indus river basin and threatening the heavily-irrigated domestic crop. Some sources estimate at least 1.3 million acres of farmland is flooded, but the degree of damage to the cotton crop is difficult to discern until floodwaters recede. Regardless, the excessive and unwelcome waters are sure to pare back the crop size and contribute to lower quality of harvestable bolls this fall. This outlook has already boosted local prices here and could spill over into Indian market prices soon.

While near-term supplies remain tight in many markets, weather in other cotton areas is boding well for the coming harvest. The near-ideal west Texas weather could prompt record yields and a crop size in the state in excess of nine million bales. Producers in this area are commenting that local cotton is in the best shape they have ever seen. In China, after poor weather caused a late start to spring plantings, generally favorable weather recently accelerated crop development. As a result, views on current crop conditions are turning more sanguine in many areas. In fact, boll opening already is occurring in Anhui, Hubei and Hebei. Similarly, heavier monsoon showers across much of India in recent weeks are easing concern for local cotton from drier delays earlier this spring. If seasonal weather rules through harvest, we would not be surprised to see larger crops produced in these three key global cotton patches.

A last key issue that will warrant attention in coming days is the pending release of reserve stocks in China. Following months of rumors, the China Cotton Association finally announced August 10th as the definite start of auctions of up to 600,000 metric tons of government surplus cotton that we first reported here. While this auction is likely to ease tight domestic fundamentals and weigh on prices in coming weeks, local prices far exceed quotes for comparable international growths. These issues impacting supply and demand are sure to influence the market in coming months, and may gain continued credence in the next forthcoming WASDE due Thursday.

Weekly Commodity Market Recap: Cotton

2010-08-02T10:23:00.002-04:00

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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.

Weekly Commodity Market Recap: Cotton

2010-07-26T18:49:00.004-04:00

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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

2010-07-19T11:18:00.003-04:00

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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

2010-07-12T12:18:00.003-04:00

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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

2010-07-06T11:44:00.002-04:00

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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.

Weekly Commodity Market Recap: Cotton

2010-06-28T11:06:00.003-04:00

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Last week’s cotton market ended with little net change for most ICE Futures U.S. contracts, which masked a roller-coaster week consisting of a Wednesday plunge offsetting four ‘up’ days for the market. As July entered First Notice Day on Thursday, most attention turned to December and how global supply/demand fundamentals may drive this heavily-traded contract. Last week, much of the southeastern U.S., eastern China, and northern India continued to bake under hotter-than-normal conditions. Relief may be on the way for these areas in coming days, suggesting some improvement for the crops in these key regions of the world’s three largest producers.

Also on the supply side, rumors continue to swirl that China is about to boost the quantity of cotton available for domestic mills. While speculation on this issue has persisted for weeks, The China Cotton Association announced late last week the government plans to issue additional import quotas as early as this week. If this proves true, the rumored amount could push the total quotas issued this marketing year to 3.6 million metric tons (16.5 million bales), the second-highest year for imports on record.

But offsetting this good news for foreign exporters, confirmation came last week that China plans to release additional supplies of cotton from ample state reserves for the second time in a year. At 600,000 tons (2.8 million bales), this volume certainly would alleviate spinning mills’ tight inventories and likely would ease skyrocketing prices for domestic cotton within China recently reported here. While the commencement date, length of release, and rate of release have not been announced, if it echoes the earlier release announced here, it could throttle back recent soaring prices in the market.

On the demand side, signs of gradual improvement for the world economy are helping support cautious optimism for a continued rebound in global mill use of cotton. Aside from the well-reported gains in textile output in the major producers across Asia, several smaller producers also are showing improvement. Reports just last week from several mid-tier cotton-consuming industries around the world reflect this trend, including Colombia here, Russia here, the U.S., and the Philippines.

This pattern suggests that not only is global mill demand for cotton likely to outpace production again in 2010/11 as we have anticipated for months, but cotton use may be poised to climb beyond current forecasts, suggesting even more pressure on already-tight global cotton stocks. In fact, the latest USDA forecast pegs global cotton mill demand for the upcoming marketing year higher by 400,000 bales from its projection just a month earlier, which itself is up 2.7 million bales from this marketing year’s estimate. What’s more, we would not be surprised to see consumption forecasts climb higher in coming months, commencing as early as next week. If so, 2010/11 will mark the fifth straight year that global mill demand for cotton outpaces cotton production, drawing down cotton inventories worldwide and supporting the notion that average prices are likely to remain elevated in coming months.

Weekly Commodity Market Recap: Cotton

2010-06-21T11:19:00.005-04:00

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Following the previous week’s surge, cotton prices on the ICE Futures U.S. exchange moderated last week, posting only modest gains during trading that saw the market grapple with news that pushed prices both higher and lower. At 81.78 cents per pound, nearby prices rose a modest 24 points for the week to the highest weekly close in a month. The market remains choppy, with daily closes for the Nearby range-bound in a 700-point channel over the last four months. For the week, dominant news that worked to pull the market higher was tighter anticipated fundamentals in China in the new marketing year, while an announcement of unrestricted exports from India partially offset this bullish sentiment.

First, an early peek at a Chinese balance sheet confirms the outlook for even tighter fundamentals in the new marketing year. Here, China’s National Cotton Market Monitoring System (NCMMS) is looking for domestic mill demand to outpace domestic supplies again in 2010/11, implying already-small ending stocks will shrink further by the end of the new marketing year, providing more fundamental evidence to support higher domestic prices. While the NCMMS looks for the Chinese harvest size to expand this autumn, it still looks for mill use to easily surpass the crop size for the twelfth straight year, implying China will have to import even more cotton in coming months. This could boost export prospects for several key foreign suppliers—particularly the U.S., India, and Brazil—and is likely to tighten global supplies, driving domestic and world prices higher. Already, average nearby prices on China’s ZCE so far in 2009/10 are up 2,908 yuan/ton (19.3 cents/lb) from the previous year and stand near a record high. If the 2010/11 ratio tightens as much as projected, this would be fundamentally friendly to even higher average domestic prices in the new marketing year.

Offsetting this sentiment somewhat, we reported here an announcement from India’s Ministry of Commerce of an apparent reversal of policy from just two months ago that now allows unregistered, duty-free cotton exports to all destinations. When restrictions were first imposed in April, U.S. prices closed limit-up and gapped even higher the next day on the assumption that U.S. supplies would fill the export void left from much of the absent Indian supplies. This determination essentially reverses these restrictions, with implementation due to take effect on October 1st, roughly when new-crop supplies begin to enter the market. While the market did not post a drop on the news similar to April’s jump, the outlook for higher Indian exports in 2010/11 could cast a bearish pall over the market in coming months.

On balance, we look for prices to remain elevated, if volatile, in coming months. A new policy shift to a weaker yuan, retreating certificated stocks, and an outlook for tight global fundamentals in the coming marketing year all point to this same view. The long-term concern is that higher—not to mention volatile—fiber costs and flat or easing prices for textile and apparel goods sold at retail imply tighter margins and increased risk exposure for those along the supply chain. Click here for a no-obligation conversation on how FCStone may be able to minimize this risk exposure for you.

Weekly Commodity Recap: Cotton

2010-06-14T10:48:00.004-04:00

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After retreating for nine straight sessions, the cotton market came roaring back last week, with nearby prices staging a weekly reversal to the upside and closing higher for four straight days before finishing the week at 81.54 cents per pound, the highest weekly close since mid-May. For the week, the July contract gained 448 points, October rose 384 points, December tacked on 366 points, and March climbed 351 points. One key factor driving prices higher has been a pronounced contraction in certificated stocks. Since reaching the highest level in a year and a half in early June, cert stocks have fallen six of the last seven trading sessions, shrinking by more than a fourth since then. A surge of more than 624,000 bales in old-crop sales—mostly to China—confirmed where most of these decerts are going. And with May Chinese cotton imports jumping another 30.6% from last year to more than 900,000 bales, Chinese mills’ voracious appetite for foreign cotton remains evident. We look for more decerts and firmer prices into the July notice period, with the outlook leaning more bullish in coming weeks.

Longer term, crop prospects are improving in several markets, suggesting the autumn harvest in the northern hemisphere may be bigger than currently anticipated and could weigh on prices later this year. Many analysts—including FCStone—agree that timely plantings and favorable weather could boost the U.S. harvest well above the 16.7 million bales currently anticipated by the USDA. In particular, the overall West Texas crop is off to one of its best starts in years, hinting at a more optimistic yield outlook—and presumably a bigger cushion of exportable supplies—for the world’s largest cotton exporter.

Similarly, monsoon activity is accelerating and intensifying across much of India, helping advance cotton plantings. After getting off to a slower-than-normal start, the monsoon has advanced northward rapidly in recent days. Additionally, evidence here shows energy available to the monsoon is spiking well above average and indeed rains last week were well above model expectations. As a result, cotton and groundnuts are expected to see a steady and timely upturn in planting over the next week, boosting early optimism for the crop in a country that devotes more land to cotton than any other.

On balance, this view supports an outlook friendlier to the shorter-term bull, and perhaps less friendly to the longer-term bear. Global cotton supplies are likely to remain tight until new crop offers come on the market this fall. But even then, a larger world harvest still is likely to fall short of global mill demand for cotton for the fifth straight year, albeit not as much as this marketing year. Regardless, this forecast implies global ending stocks in the coming 2010/11 marketing year could fall to the lowest in years, driving the stocks-to-use ratio to the tightest since 1994/95, when world prices averaged over 90 cents per pound.

Weekly Commodity Market Recap: Cotton

2010-06-07T11:36:00.006-04:00

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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.

Weekly Commodity Market Recap: Cotton

2010-05-17T11:38:00.002-04:00

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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

2010-05-10T11:13:00.003-04:00

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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

2010-05-03T11:27:00.005-04:00

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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.

Weekly Commodity Market Recap: Cotton

2010-04-26T10:36:00.004-04:00

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The ebb and flow of the cotton market turned decidedly in the direction of the bulls last week, with several indicators helping prices advance. Cotton broke out of its horizontal trading range established over the last two months, primarily driven higher by a surprise announcement here that India would suspend registrations and exports of cotton for the time being, effective immediately. Responding to the steep increase in local cotton prices, India’s Office of the Textile Commissioner took this unusual move in order to boost domestic supplies and presumably temper the recent gains in local prices. Ironically, this action is likely to deplete already-short stocks of exportable supplies in the rest of the world, driving global prices higher. In response, Nearby prices on the ICE Futures U.S. exchange gapped higher on the news, surging 619 points on the week to close Friday at 86.20 cents per pound, the highest weekly close in fourteen years. Similarly, the Cotlook ‘A’ Index, a proxy for global prices, soared in step to 91.30 last week, the highest level also since the mid-1990s, reflecting higher prices worldwide for cotton.

Also bullish for price was news of a spurt in weekly exports of U.S. cotton here. Shipments climbed past 350,000 bales for the first time this marketing year, reflecting strong growth to a number of key markets. In particular, cotton destined for Chinese and Bangladeshi mills rose to the highest volume so far this marketing year. With rumors circulating that China is set to increase its tariff rate quota again soon coupled with news that India likely will not be nearly as large a competitor in coming weeks, U.S. cotton stands a strong chance of surging to China in the remainder of this marketing year. Also, forecasts for record mill demand and imports of cotton in Bangladesh suggest U.S. cotton may fare well this year as well. On balance, we look for U.S. cotton exports to follow their normal seasonal trend of accelerating in the remaining weeks of the marketing year, with mounting evidence suggesting shipments in 2009/10 could exceed the latest USDA forecast of 12.0 million bales as we first suggested here.

Although market fundamentals point to higher cotton prices, last week’s spurt may have driven the market into overbought territory—especially if the credit situation in Greece causes speculators to lighten up on risk. In the past four decades, there have only been five price moves above 90 cents per pound, and as cotton prices begin to approach this psychologically important level, the market may find willing sellers, as weak longs and commercial traders try to lock-in relatively high historic prices. The most recent Commitment of Traders report shows commercial traders increasing their net-short cotton position by nearly 11,500 contracts as of April 13th. This was before India’s announced export ban, as well as before prices moved above the consolidation range established over the last two months. Next week’s report will be interesting to see if commercials continued to sell into the rally, or if speculative accounts, mainly trend-following funds, were adding to their long positions on the chart breakout. One thing that appears evident is that cotton traders should have an interesting trading environment well into 2010, and that risk exposure for both producers and consumers is likely to be more pronounced than in recent memory.

Weekly Commodity Market Recap: Cotton

2010-04-19T10:58:00.003-04:00

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As both supply and demand signals both grew louder in recent days, nearby cotton prices last week remained firmly rooted within their trading range established over the last two months, with neither longs nor shorts eager to commit to either direction. On the supply side, production prospects continue to improve in several markets. The Australian harvest is advancing under near-ideal weather conditions here, suggesting yields and crop size may be somewhat larger than current USDA forecasts indicate. In the Northern Hemisphere, hotter-than-normal springtime temperatures across much of India detailed here hint at a wetter-than-normal monsoon, boosting early projections for yields for several crops, including cotton. And in the U.S., adequate subsoil moisture levels combined with dry weather across much of the Cotton Belt here are allowing producers to commence plantings with a fair bit of optimism for the new crop. Each of these supply-side indicators turned more sanguine for yields in recent days, adding to the bears’ argument for lower prices.

At the same time, demand signals continue to firm in several markets as the global economy recovers and re-accelerates, reinforcing the bulls’ position for continued gains in prices. Chinese cotton imports discussed here tripled their year-ago volume in March, climbing to the highest volume in almost four years. Rampant speculation persists that China will issue additional import quota again soon to ease an expected supply shortfall. If so, this would likely propel futures prices higher, as the U.S. remains the residual supplier on the world market. Here, Turkish purchases of U.S. cotton rose to the highest February in several years two months ago, trending higher with improving mill demand in Turkey and accelerating season-to-date growth for the second-largest market for U.S. cotton exports. Even U.S. mills are enjoying new-found exuberant business, with March year-over-year textile output here climbing at the fastest pace since 1987, boding well for cotton consumption prospects.

The juxtaposition of louder arguments from both the bulls and bears leaves cotton prices mired in their same trading range witnessed since mid-February. At 80.01, the Nearby contract rose 1.94 cents on the week, oscillating lower then higher for the sixth straight week. Even the technicals appear indecisive right now. Momentum oscillators and moving averages are providing little clue to the direction of general momentum. Long-term moving averages are still trending higher, while short-term moving averages are moving sideways along with price. The crossing of the ten-day and forty-day moving averages is a bit bearish, but only slightly so considering the forty- and fifty-day averages are still in a solid uptrend.

Outside indicators ranging from the fallout from Goldman Sachs to the euro presently are somewhat bearish for cotton, but we take notice of China’s looming impact from higher tariff rate quotas. Greek debt issues and the impact on Europe from the Icelandic eruption are sinking the euro and boosting the dollar, pressuring commodities lower. But should Chinese imports surge even more in coming months, this could trump most other near-term drivers on the market. We find little reason to commit to either direction so long as the market stays range-bound, although we continue our longer-term bias to an upside breakout over a move lower out of the recent trading range.

Weekly Commodity Market Recap: Cotton

2010-04-05T10:22:00.002-04:00

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Futures prices rebounded during last week’s holiday-shortened trading, as a decline in the dollar and robust export sales were friendly to cotton prices, with futures remaining well within a six-cent trading range established over the last six weeks. Nearby cotton prices rose 181 points on the week to close at 81.50 cents per pound, with three days of higher prices offsetting Tuesday’s modest decline. Traders last week viewed the USDA’s Prospective Plantings report as a non-event. The 10.5 million-acre forecast for spring plantings was close to market consensus and our own projection discussed last week here. With this outlook already factored into the market, traders instead discerned price direction from other factors.

A more pronounced impact on the market came from a weaker dollar, which boosted prices for several commodities, including cotton. The U.S. Dollar Index lost over half a point last week, closing at 81.44. This spurred oil prices to almost $85/barrel late last week, nearing the highest point in seventeen months. Oil also is likely to benefit from Friday’s sanguine jobs data, igniting hopes of a pickup in energy demand. Longer term, higher oil prices could support higher synthetic fiber prices, helping shift demand back to cotton.

The weaker dollar also boosted prices for a host of commodities, helping drive the rebound in cotton prices. The Reuters/CRB Index jumped last week to more than 276.4, nearing its highest level in two and a half months. Part of the positive commodity price action was attributable to more positive manufacturing news. The latest report from the Institute for Supply Management showed manufacturing activity made its largest jump since 2004. The increase was driven by significant growth in new orders and production. Almost all manufacturing sectors screened in the report showed a jump in activity, echoing the vigor we are witnessing in the domestic textile sector. While the rise in this basket-price of commodities did little to boost prices last week for crops that compete with cotton for southern acres—particularly corn, wheat, and soybeans—the increase cemented sentiment that cotton will reclaim a large swath of acres lost to other crops over the last two years.

Closer to home, two key indicators helped propel cotton prices higher on the week. First, weekly export sales were surprisingly good with a total of 279,000 bales in new sales recorded. Shipments were also excellent at 301,500 bales. Also, rumors are spreading that China—the world’s largest cotton importer—is likely to increase its import quota again in coming weeks, boosting prospects for additional shipments before the end of the marketing year. This evidence prompted us to revise our U.S. export forecast higher than the USDA here, friendly to higher prices. A second key indicator is the recent surge in unfixed call sales. At 70,424 contracts, the volume in unfixed call sales is the highest in over two years, helping weekly cotton futures rebound to one of the highest closes in over two years.

As the marketing year winds down, trading in coming days is less likely to be influenced by the next USDA WASDE report due Friday and more likely to be driven by weather developments. We look for April’s WASDE to show modestly tighter fundamentals in the U.S., mostly due to higher U.S. exports this marketing year. But small adjustments to old-crop fundamentals also are likely to become more of a non-issue in coming weeks, as the market’s attention turns to the size of spring plantings in the northern hemisphere and weather conditions after germination.

Weekly Commodity Market Recap: Cotton

2010-03-29T13:24:00.004-04:00

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Futures prices eased lower last week, remaining well within a six-cent trading range established over the last five weeks as concern mounts over soaring fiber costs and higher domestic cotton plantings this spring. Nearby cotton prices retreated 2.49 cents to finish the week at 79.69 cents per pound, the lowest weekly close since mid-February. While the fundamentals continue to point to higher prices for the 2010/11 marketing year, near-term bulls are running out of steam, promising to make for volatile spring trading.

A handful of factors that contributed to drive prices higher in recent months seem to be losing steam in recent days. First, on the old-crop supply side, government efforts in China to relieve transportation bottlenecks in Xinjiang Province—China’s largest cotton producer—finally seem to be having their desired effect. Daily railcars for moving cotton from farms in the West to mills in the East increased to 170-180 since March 23, and could possibly increase further to 250. While this is rather late in the procurement season for the area, the increase is likely to ease supply constraints somewhat, whether actual or perceived. Additionally, the dollar is trading at a nine-month high on European debt concerns that are sinking the euro, hindering gains in commodity prices.

On the demand side, complaints from downstream producers in different markets are mounting over perceived exorbitant yarn prices. Indian knitwear manufacturers are unsettled over soaring cotton and yarn prices, with reports suggesting the sector is planning to ask buyers to pay one-fifth more to meet rising yarn prices. Similarly in neighboring Pakistan, angst over soaring yarn prices and perceived tight supplies here is pitting the yarn sector against downstream interests like never before, with the exasperated government unlikely to find a suitable compromise to satisfy both sectors. In China, rapid gains in cotton and yarn prices also are eating into the profit of downstream manufacturers. In particular, smaller yarn and fabric makers are cutting production or increasing polyester use as we demonstrated here to combat the surge in cotton fiber and yarn prices.

Another consequence of the sustained rise in cotton prices witnessed over the last year is likely to be a dramatic jump in cotton acreage in several key producers around the world. In particular, an issue likely to be closely watched by the market this week is the annual Prospective Plantings report from the USDA. This report is expected to show increases of 1 to 1.5 million acres, with potential production of 16 million bales or more. This would mark a reversal in trend from the declines witnessed over each of the last three years and a dramatic rebound from the 9.1 million acres planted a year ago, the lowest in more than a quarter century. While a 16 million-bale crop is comparable to the average volume produced over the last three decades, it is much larger than the harvest sizes each of the last two years. While we remain bullish for price over the long term, these issues are likely to temper much of the enthusiasm for robust gains in price witnessed over the last year. Instead, more modest gains in the long term may be more likely, while downstream resistance from fabric and apparel manufacturers is likely to make for choppy trading in coming weeks.

Weekly Commodity Market Recap: Cotton

2010-03-22T10:13:00.004-04:00

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Cotton prices managed to rebound last week, in spite of mounting bearish evidence hinting at the increased potential for a pullback. Viewed from the bulls’ perspective, cotton’s climb last week came on news of higher unfixed on-call sales and the biggest U.S. cotton exports in nine months. The CFTC’s latest Cotton on Call report indicates unfixed on-call sales are growing at a rapid pace, particularly in the July contract. Total unfixed on-call sales merchants made to textile mills jumped to 68,829 contracts, the highest in two years, supporting higher ICE futures. The July contract rose by 816 contracts to a record 23,159. There are only 11,713 unfixed on-call purchases merchants have made from growers, providing very little in the way of an “offset”. As mills continue to add to their on-call position, it represents more futures that will need to be bought during a smaller window of time, suggesting higher prices are likely.

The bulls also point to the latest report of robust sales and shipments abroad for cotton. Total exports of Upland and Pima cotton reached 312,661 480-lb. bales in the week ending March 11, driven by soaring volume to America’s largest market. Exports destined for Chinese textile mills surged to 152,268 bales, the highest level so far this marketing year. In fact, this weekly volume was almost as much as the U.S. shipped to all other markets combined, reflecting China’s expanding share of total U.S. cotton exports over the last several months. The surging shipments to China in recent weeks echo our observation here of rapid growth in total Chinese cotton imports and suggest cumulative U.S. exports to China this marketing year may climb to the second-highest level ever recorded, something certainly bullish for price.

But from a stronger dollar to higher acreage forecasts for spring plantings, different bearish indicators are looming and likely to offset much of the enthusiasm for higher prices in coming weeks. Greece’s ongoing debt problems led to a weaker euro and stronger dollar last week, limiting gains on commodities. The U.S. Dollar Index finished the week higher at 80.7, rivaling its highest level in 21 months and hindering gains across a variety of commodities.

Finally, some price impacts may be coming from excellent topsoil moisture reports across the South and private acreage estimates released last week. One planted acreage report disseminated last week pegged spring U.S. cotton plantings at 10.3 million acres, well up from a year earlier. The market is likely to trend sideways in coming days, in anticipation of the March 31 Prospective Plantings report from the USDA. While the market looks for an increase in cotton acres this spring, the question is how much. Certainly, weather in coming months will impact yields—something difficult to accurately gauge this early in the year—but one early hint at the potential for better-than-average yields is ample topsoil moisture. The latest nationwide map here shows much of the South is wetter than normal, with no cotton acres reported as abnormally dry. This early sign hints that the surge in price over the last year may slow in coming weeks under the weight of a much larger cotton crop.

Weekly Commodity Market Recap: Cotton

2010-03-15T12:00:00.003-04:00

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After rocketing ahead in February to its highest point in two years, cotton futures prices retreated last week, falling four of five trading days as the latest WASDE report from the USDA failed to impress and prices responded both to overbought technicals and mounting concerns about the economy. The Nearby finished the week at 80.47 cents per pound, off 1.96 cents from the week before. As we suspected here, the latest USDA forecasts saw global production ease, while U.S. fundamentals were little changed from the previous month, supporting our notion that global drivers would have more of an impact on the market this week than the domestic market. In fact, one could argue that the ‘news’ of a smaller global crop had already been factored into the market, as this information had been widely publicized for some time. Aside from this issue, there were few fundamental surprises in the report to drive price, allowing bearish technicals and outside influences to dictate price for the week.

Weighing negatively on the market this week were several overbought indicators and more worries about the U.S. economy. For example, as prices soared to their two-year high in early March, the RSI signaled the need for a correction. At 77.72, this indicator reached its highest level in 21 months, a few standard deviations away from its long-term 50.0 mean. Economic news last week also weighed on the market. Among other news, weekly U.S. jobless claims for February were higher than expected, and Chinese inflation rose to a sixteen-month high, hinting that tighter monetary policy may stifle rapid consumer demand there later in 2010.

But after four straight losses, prices rebounded on Friday, recouping mid-week losses. Stronger-than-expected February retail sales figures encouraged shorts to cover on Friday, in spite of sagging clothing store sales. A weaker dollar on Friday also fueled speculation of a likely improvement in relatively unimpressive U.S. export sales. Friday’s Commitment of Traders report showed the large specs adding 4,101 longs and 412 shorts to their combined futures and options position in the week ending March 9th, helping spur the improvement in price. Technically, trades formed a ‘bullish engulfing’ pattern on the Japanese candlestick charts. What’s more, Chinese futures prices rebounded Monday, with Nearby ZCE prices reaching 16,295 yuan per ton ($1.08 per pound), close to the ZCE record-high set in early January. This late-week turnaround leaves us believing the market may have found significant near-term support. The longer-term question remains as to how much global cotton acreage will expand this spring, and how much further the bulls will drive the market before bigger crop prospects come into focus this fall.

Weekly Commodity Market Recap: Cotton

2010-03-08T10:23:00.005-05:00

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After surging ahead in recent weeks on the outlook for tighter domestic and global fundamentals, cotton prices moderated last week in advance of the USDA’s next WASDE report, easing as technicals turned increasingly overbought. At 84.60 cents per pound, intraday trading last week reached the highest level in two years, following three straight weeks of gains that saw nearby futures soar 17 cents in less than a month. But the market may have overreached—at least for the time being—suggesting prices may consolidate in the short term as attention increasingly turns from tighter old-crop fundamentals to the longer-term outlook for a bigger U.S. and world harvest this autumn.

Wednesday’s WASDE report is likely to show few changes in U.S. old-crop fundamentals, tempering the recent streak of gains in domestic prices. Evidence suggests the U.S. balance sheet only may tighten marginally if at all, while global production is likely to see a more pronounced decline. We have long argued here that India’s harvest size may be overstated, and recent forecasts from China’s NBS here may color the USDA’s projections this week. This suggests global drivers may have more of an impact on the market this week than the domestic market, contrary to the trend reflected over recent months in the graph below.

On balance, futures trading last week was quiet and mostly dull, with traders focusing on the consensus outlook emanating from the International Cotton Association conference in Singapore. After the week’s high was set Monday and the low set Tuesday, trading during the rest of the week remained within that range, with volume well below trend. Presenters’ comments at the ICA meeting were mostly bullish, suggesting that supplies will remain tight through 2010, but likely higher plantings this spring in a number of markets are likely to boost global cotton supplies in 2011, unless crop troubles in China or India cause prices to “explode”. With the global economy on the rebound, increased demand for cotton in the new marketing year is all but certain. As a result, the longer-term outlook for price will be heavily influenced by how much global production rebounds, causing the market now to increasingly turn its attention to pre-plant weather conditions in key markets around the world.

Weekly Commodity Market Recap: Cotton

2010-02-22T10:29:00.004-05:00

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ICE U.S. cotton futures rocketed ahead for the second straight week, capping off nine consecutive days of higher closes on the robust outlook for bullish fundamentals in the next marketing year. The nearby soared 440 points for the week to 78.79 by Friday, the highest weekly close since its March 2008 spike. At the 2010 Ag Outlook Forum just outside Washington, DC last week, USDA analysts speculated that bullish fundamentals both in the U.S. and worldwide will persist into the new marketing year. Giving its first peek at a new-crop balance sheet, the USDA looks for global mill demand to outpace production for the fifth straight year, resulting in another decline in ending stocks in 2010/11. This would mean a world stocks-to-use ratio of 41.8%, down from 45.1% estimated for 2009/10 and the lowest since 1994/95, presumably boosting prices next year. Already, the marketing year-to-date average ‘A’ Index price is 75.0 cents per pound, with prices surpassing 83 cents by late February.

Echoing sentiment expressed earlier by others, the USDA believes the U.S. crop is likely to rebound from its lowest level in a quarter century on the outlook for a big jump in plantings and presumed normal yields across the cotton belt. Already, the most year-to-date precipitation in years has fallen around Lubbock here, boosting optimism for higher yields. But higher offtake may absorb the jump in production, leaving domestic ending stocks little changed. This year’s stocks-to-use ratio of 21% is projected to remain about the same in 2010/11, implying prices are likely to remain robust. The USDA projects the marketing year average U.S. price at 64 cents, compared with 62 cents for 2009/10.

While a myopic view of the fundamentals strongly points to even higher prices, we are cautious over the long term, as even higher prices may limit the number of mills able to pay these rates. As most any textile mill will acknowledge, downstream price pressures ensure that the only thing worse than high prices is volatile prices. And this marketing year has been full of both so far, hindering mills’ ability to forward price yarn quotes for remunerative—but still competitive—price points. Since beginning the marketing year at roughly 63 cents per pound, nearby prices are up almost 40% in less than six months. And while market fundamentals may point to continued gains in prices longer term, mills are unlikely to see remunerative prices paid for yarns, impacting both cotton share and viability for many. To avoid this dismal scenario, we encourage you to speak with one of our risk management consultants here to review your exposure to risk and see how we may be able to minimize this exposure for you.

Weekly Commodity Market Recap: Cotton

2010-02-16T10:30:00.002-05:00

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After tumbling for five straight weeks to the lowest close in three months, nearby cotton futures soared last week, posting its biggest weekly jump in almost seven years. At 74.39 cents per pound, the market finished Friday up 777 points from a week earlier to the highest close since its January 4 peak. The dramatic rebound primarily is attributable to fundamental issues directly impacting the fiber, rather than external factors swaying the tide of most commodities.

In particular, a bullish late-season revision to the USDA’s monthly WASDE report helped set the tone for the week on Tuesday morning. The USDA revised its U.S. export forecast higher by one million bales from January, the largest increase in history at this point in the marketing year. The jump is in response to robust new sales each of the last several weeks and predicated on the belief that exportable supplies from key competitors in Brazil and India may dwindle sooner than expected. In turn, higher anticipated exports in 2009/10 drove projected ending stocks for this marketing year lower by one million bales, to 3.3 million. Forecasts for higher demand and lower ending stocks tightened the anticipated stocks-to-use ratio to 21.4%, the second lowest in a dozen years. These tighter fundamentals drove nearby futures limit-up in Tuesday trading, helping shake off the bearish pall hanging over the market in 2010. Additionally, as this anticipated ratio has gradually tightened each month over most of the marketing year, it has driven futures prices higher. February’s 21.4% stocks-to-use ratio implies further gains in price may be forthcoming in the near term.

Weekly Commodity Market Recap: Cotton

2010-02-08T11:07:00.007-05:00

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After again largely ignoring fundamentals internal to the cotton market, cotton futures prices retreated for the fifth straight week, succumbing to the overarching bearish influence of a stronger dollar. The Nearby price on the ICE Futures U.S. exchange plunged 241 points from the previous week to 66.62 cents per pound, a two-month low. This weighed on every subsequent contract month, dragging each lower again, down for every week in 2010. While the week did produce some bullish news for cotton, the dollar remains the key drag on the market.

The bulls took little comfort in robust export sales and further evidence of a smaller Indian crop last week. Net upland sales jumped to a marketing-year high of 519,500 running bales, particularly driven by big volume to China. Weekly shipments also improved, reaching almost 250,000 bales, the second-highest point so far in 2009/10. Exports to mid-tier markets like Mexico, Thailand, and Peru also climbed to marketing-year highs, and market sentiment suggests shipments in coming days are also likely to remain strong.

More voices are adding to the cacophony of suspicion that India’s harvest size is overstated, echoing our long-held argument here. Most recently, the Cotton Association of India pegged the harvest size lower from their earlier forecasts at just 30.2 million bales (170kg), down half a million bales from their previous forecast just over two months ago. We would not be surprised to see forecasts ease even lower in coming months, heartening the bulls’ position.

In spite of these signals of tighter fundamentals last week, the dollar remains the 800-pound gorilla weighing on commodity markets, including cotton. Signs of debt troubles in several European markets are sinking the euro, driving the greenback higher and dragging commodity prices lower. After reaching a fourteen-month high earlier this year, the Reuters/CRB Index is down 35 points to 258.55, a three-month low. Cotton prices are lower in concert with the collapse in the broader index. If the lack of concrete proposals to the European debt concerns from this weekend’s G-7 meeting is any guide, the euro may remain under pressure in coming weeks, implying commodity prices—including cotton prices—also may struggle to post a sustained rebound in the near term.

Looking ahead, our estimates for changes to the forthcoming USDA WASDE forecasts portend tighter domestic markets for the current marketing year:

-U.S. production for 2009/2010: We see the USDA easing its production forecast for the fourth time in five months, down to 12.25 million bales. The volume of ginning and classing of this season's crop here and here remains behind this point last year, hinting that the anticipated harvest size will contract further. In fact, we would not be surprised to see the final crop size even lower—closer to 12.1 million—but we look for the USDA to make only another incremental step in that direction in its February report.

-U.S. exports for 2009/2010: We look for the USDA to revise its export forecast higher again in February, to 11.15 million bales. Already, this moving target has been revised 800,000 bales higher over the last five months, and particularly in light of robust export reports in recent weeks, we anticipate the actual level to be higher than the current 11.0 million-bale forecast.

-Ending stocks for 2009/2010: With a 150,000-bale increase in the harvest size, a 150,000-bale increase in exports, and no presumed change in mill use, ending stocks are likely to ease by 300,000 bales from January's 4.3 million bales to 4.0 million. If so, this would mark the fifth straight month of gradually lower ending stocks. Coupled with higher demand, the lower ending stocks imply a tighter anticipated stocks-to-use ratio for 2009/10, friendly to higher prices. As a result, we look for the market to grapple in coming weeks with the opposing prospects of tighter ending stocks in 2009/10 versus the heavy influence of a stronger dollar.

Weekly Commodity Market Recap: Cotton

2010-02-01T10:53:00.006-05:00

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Since trading at an eighteen-month high early this year, nearby cotton prices fell fourteen of the last eighteen trading sessions, down for four straight weeks. At just 69.03 cents per pound, Friday’s close is the lowest in two and a half months. While some fundamental signals last week in the cotton market improved, this latest week’s decline came in response to a strengthening dollar, lower oil prices, and weaker bean and grains prices.

First, demand-side indicators for cotton firmed last week, but did little just yet to stanch the hemorrhaging in price. Weekly export sales discussed here climbed to the highest in eleven months, driven almost entirely by robust purchases by China. Similarly, cumulative Pima cotton exports so far in 2009/10 total more than 495,000 bales, over ten times the volume shipped by this point last year, accounting for much of the recent escalation in price for this species here. Even U.S. mill demand is showing signs of life. Recent months’ annualized cotton usage in domestic mills is averaging higher than the USDA’s latest 3.4 million-bale forecast, helping support the market. But in spite of these signs of improved demand prospects, external influences maintain a heavy influence over cotton, dragging prices lower again last week.

In particular, the resurgent dollar is weighing on a host of commodity prices, including cotton. Since reaching an eighteen-month low in November, the dollar is up six of the last nine weeks, closing Friday at 79.65, its highest weekly close in more than six months. Better-than-expected GDP data in the U.S. last week suggest the U.S. economy is recovering more rapidly than its European or Japanese counterparts, helping spur the greenback higher. A slew of key economic reports this week—including non-farm payroll data—will shed more light on this notion and will direct the dollar further in coming days. Over the last several years, few variables have had as large an impact on cotton prices as the value of the dollar. This trend continues in 2010, as the rebound in the dollar is pulling cotton prices lower, as the graph below shows.

Moving in tandem with weaker cotton prices, crude oil prices are also lower each of the first several weeks of 2010. Since reaching a fourteen-month high early this year, the price of a barrel of crude has fallen over ten dollars to a three-week low of $72.89 amid concerns over Chinese monetary policy and U.S. banking regulations. Analysts expect geopolitical tension, ongoing financial risks and further liquidation of speculative long positions to continue to weigh on oil prices in coming weeks, hindering any rebound in smaller markets for other commodities like cotton.

Likewise, the drag on cotton prices from a stronger dollar and weaker oil prices so far this year is being felt in corn and soybean prices. As prices for all three have eased over the first few weeks of the New Year, we don’t look for this to have a marked decline on the outlook for U.S. plantings this spring. While cotton is lower from a few weeks ago, so too are other crops, and cotton is still trading for a relative premium against these other crops versus this time last year. Accordingly, we maintain our outlook that cotton plantings in the U.S. will rebound in coming months, perhaps upwards of 10%, outpacing the percentage increase in corn or bean plantings. This implies U.S. area may exceed 10 million acres, well up from last year’s 9.15 million acres, the lowest in over a quarter century.

Weekly Commodity Market Recap: Cotton

2010-01-25T11:03:00.005-05:00

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Cotton futures retreated for the third straight week last week, dropping more than a cent to the lowest weekly close since mid-November in response to a stronger dollar, weaker alternative crop prices, and credit concerns in China. The 2010 retrenchment in price continued last week, with nearby futures easing lower three of the four trading days during the holiday-shortened week, before settling Friday at 71.07 cents per pound.

One key issue weighing on cotton prices is a resurgent dollar. The greenback rose sharply last week, boosted by a weaker euro, news that China was tightening its monetary and credit policies, and an increase in demand for lower yielding assets. The U.S. Dollar Index finished the week at 78.43, its highest weekly close in five months. In addition to cotton, the stronger dollar also weighed on prices for other ag commodities, dragging cotton lower.

Corn, wheat, and soybean prices all extended their 2010 declines again in the latest week, in concert with lower cotton prices. However, the losses in other key competing crops outpaced the latest weekly decline in cotton prices, implying these other crops dragged cotton prices lower. Since the start of the year, nearby cotton futures are off 6.5%. But wheat, corn, and bean prices are faring even worse, falling between 8-13% over just the first three weeks of the year. These relatively lower prices for other crops support our earlier outlook that cotton may buy back land for spring plantings in a number of markets, particularly the United States.

Finally, the week brought news of efforts in China to slow lending in order to ease concern of a ballooning credit bubble and proactively tamp out inflationary sparks. The country’s regulatory commission instructed banks to slow access to loans in order to tighten loose credit standards. However, Chinese textile and apparel manufacturers already have seen growth in capital investment in the sector slow considerably in recent years. Any further restrictions on new investment may crimp fiber demand longer term, hindering the price outlook.

The decline in U.S. cotton futures prompted another strong week of exports. The latest export sales report pegged net new sales of upland and Pima at 347,000 bales, one of the strongest showings this week. Similarly, weekly exports climbed to 233,000 bales, the second-highest level this marketing year. China remains—by far—the largest buyer of U.S. cotton, but we look for interest from the region to slow as the Chinese New Year approaches in mid-February.

Barring another financial market meltdown or a double-dip recession, our opinion remains that cotton demand will continue to outpace production (even with a presumed increase in plantings). As we discussed last week here, mills are still quite short, and still have on-call contracts that need to be fixed. For these reasons, we believe that while cotton may trade lower in the next few days or even the next few weeks, it will find underlying demand limiting its downward correction witnessed over the first few weeks of the New Year.

Weekly Commodity Market Recap: Cotton

2010-01-19T11:39:00.004-05:00

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The corrective consolidation in prices extended into the latest week, as weaker cotton fundamentals, plunging Chinese prices, and lower commitments of traders data weighed on U.S. prices. The nearby March contract finished the week down a modest 36 points from the week before, at the lowest close since mid-November.

The week began with an impressive 180-point jump Monday, buoyed by a weaker dollar and sentiment for tighter global ending stocks in Tuesday’s WASDE report from the USDA. However, the optimism for higher prices sagged Tuesday, with prices falling three of the next four days following release of the WASDE report. Tuesday prices gave back most of Monday’s gains, falling 145 points. While USDA projections for U.S. fundamentals closely matched FCStone forecasts, the USDA figures for global supply and demand were more bearish than the market had anticipated. The bearishness carried over into the following day, when Wednesday prices tested the previous week’s low of 72.43, before closing at 73.43, up 64 points. The only other note of bullishness came Thursday following the release of the U.S. export sales report. At 460,726 480-lb. bales of Upland and Pima, sales climbed to a marketing-year high. Similarly, exports jumped in the latest week to 211,891 bales, the biggest volume since early October. Cotton destined for China accounted for the bulk of the surge, with weekly shipments the most in eight months. But in spite of this news, prices eased lower each of the last two days of the week, finishing at 72.08—a seven-week low—sunk by weaker Chinese prices and a stronger dollar.

Even as prices have eased from recent highs on the ICE Futures U.S. exchange, prices on China’s Zhengzhou Commodity Exchange have fallen much faster, weighing on global markets. Since peaking on January 4, the most-traded May contract is off 1,010 yuan per metric ton (6.72 cents per pound) to 15,830 yuan per ton, outpacing the 3.92-cent drop in March futures on the ICE exchange. Market open interest is well off its record peak set two weeks ago as well, falling by more than a third. The plunge both in open interest and prices on the ZCE is pulling market prices on this exchange closer into parity with U.S. futures prices, something we anticipated here.

U.S. futures also are easing lower on signals from the trade. First, reports of lower unfixed call sales from the CFTC weighed on futures prices last week. A significant net reduction took place on the mill side in unfixed on-call positions during last week's price skid, where mills fixed prices on 3,324 lots to reduce unfixed call sales to 49,548 lots. Unfixed holdings on the producer side increased a net 46 lots to 10,524. A second report from the CFTC showed funds and speculators cut cotton futures-options net longs to lowest combined total since week ended Nov. 24, trending in step with the decline in futures prices. Commercials reduced net shorts to 53.2% of open interest, down 10.7 percentage points from eight weeks earlier. Meanwhile, funds and speculators reduced their net longs by a combined 8,587 lots in cotton futures with options during the week ended last Tuesday, according to supplemental data reported by the CFTC Friday. They were net long a combined 131,333 lots, the lowest since the week ended November 24. Trend-following funds trimmed their net longs by 6,255 lots to 41,049, index funds pared theirs by 2,281 lots to 78,055 contracts, and small specs cut theirs by 80 lots to 12,299. The reduction by index funds came on the heels of earlier expectations for a fresh influx of money into the cotton market around the first of the year as a result of rebalancing and has sapped much of the market’s enthusiasm for higher prices.

As a result of the weaker global fundamentals, steep drop in Chinese prices, and unexpected declines in traders’ commitments, futures prices are well off their early-January highs. However, merchants still need to purchase more futures contracts than sell in order to even out their on-call positions, suggesting sentiment has not tilted to the bears just yet. We continue to expect prices to move sideways to higher over the next few weeks, once this correction is fully digested. But should alternative row crops remain at current levels, this divergence in prices will likely prompt a modest increase in U.S. cotton plantings in the spring, which longer term may stem the gains in cotton prices.

Weekly Commodity Market Recap: Cotton

2010-01-11T10:36:00.003-05:00

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A barrage of bearish data weighed on cotton prices last week, dragging U.S. and Chinese markets lower into an overdue correction, consolidating and setting the stage before prices resume their gradual march higher this winter. Following a move to new highs early last week, cotton prices on the ICE Futures U.S. tumbled three of the next four days, finishing Friday at 72.44 cents per pound, the lowest level in seven weeks. Several issues together pulled prices lower on the week, including prospects for looser anticipated global fundamentals on Tuesday’s WASDE report, rumors of fund balancing, lower Chinese futures prices, and the Chinese central bank’s raising of interest rates.

First, market sentiment points to higher global cotton production forecasts when the USDA releases its next WASDE report Tuesday morning, boosting anticipated carryover stocks. Here, beneficial rains across the eastern third of Australia over the last half month continue to ease crop concerns from just a few months ago. While the crop there still needs ample moisture during the crucial February fruiting period, ample December and January showers dramatically boosted yield prospects for one of the world’s leading cotton exporters. Similarly, excellent crop conditions across much of the Brazilian cotton belt here are helping improve harvest prospects in the Southern Hemisphere’s largest producer this year. Additionally, the latest data on the robust pace of cotton arrivals in Pakistan here continue to support our long-held view that production forecasts in this market remain too conservative. Together, should these harvest sizes be revised higher as we anticipate, the increase in global supply could temper much of the near-term enthusiasm for continued price gains.

A second issue that weighed on cotton prices last week was rumors of fund rebalancing and a rebound in the dollar. According to the CFTC Commitments of Traders Report, for the week ending January 5th, index funds were net sellers of only 123 contracts, which reduced their net long position to 80,336 contracts. Hedge funds, however, were more aggressive sellers, decreasing their net long position by 4,423 contracts to stand at 41,032. But several market watchers see this as profit-taking by long-only funds, and not an indication that index funds are any less bullish.

The dollar also dragged on many commodities last week, including cotton. In the first full week of trading in the New Year, the U.S. Dollar Index rebounded to 77.655, a three-week high. But Friday’s disappointing jobs report and higher oil prices are likely to temper gains in the greenback in coming days, improving the near-term outlook for cotton.

Lastly, U.S. futures prices were heavily influenced by China’s impact on the market. Plummeting cotton prices on China’s Zhengzhou Commodity Exchange (ZCE) dragged U.S. prices lower. The most-traded May contract on the ZCE fell 570 yuan per ton last week (3.8 cents per pound) on plunging volume and open interest, the biggest weekly drop in months. The drop in futures came as The People's Bank of China Thursday raised the interest rate on its three-month treasury bills for the first time since this summer, stoking fears that Beijing could start tightening monetary policy in the coming months. Market perception is that as the Chinese attempt to gently slow economic growth and head off inflation, consumption of raw materials will slow. This policy shift reverberated across cotton markets around the world, driving prices lower.

While we acknowledge the overdue need for this corrective consolidation in prices, we continue to expect prices to continue to move sideways to higher over the next few weeks, which will likely prompt a modest increase in U.S. cotton plantings in the spring.

Weekly Commodity Market Recap: Cotton

2010-01-04T10:02:00.003-05:00

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Cotton enjoyed another week of gains, finishing the year with its highest weekly close since the March 2008 spike. Re-strengthening global demand signals continue to support price, along with soaring trade on China’s Zhengzhou Commodity Exchange (ZCE). A firmer demand picture came into focus this last week, framed by good news in several markets. U.S. export sales of Upland cotton hit a marketing year high of 349,576 bales during the previous week, with much of these sales to China. News of another month of double-digit growth in Pakistani cotton yarn exports here suggested fabric mills across Asia are ramping up production. Likewise, Thai cotton yarn exports detailed here soared at the fastest pace in six years, echoing this sentiment. Downstream, faster growth in retail apparel sales in several markets including Taiwan, Canada, and Poland here confirms the improving prospects for cotton mill demand, as once-wary shoppers begin to return to stores in key markets around the world.

A second key driver impacting prices both in the U.S. and around the world has been the impressive performance of futures trading on China’s ZCE. Prices on the most-trade May contract stand at a record level, followed by soaring volume and open interest. As we discuss here, in just the last week, the May contract soared 835 yuan (5.55 cents per pound) to its new record, as volume more than doubled over the same short period to a record 584,560 contracts. Short supplies, transportation bottlenecks, and faster growth in mill demand for cotton are helping propel Chinese cotton futures prices to these uncharted heights, but the potential for increased cotton plantings this spring may ease price pressure in coming months.

In light of these bullish fundamentals, we look for prices to continue to move sideways to higher over the next few weeks, which will likely prompt a sizable increase in U.S. cotton plantings in the spring. Wednesday morning the market will digest the latest economic outlook from the National Cotton Council, followed by a detailed supply/demand outlook from the International Cotton Advisory Committee and comments on regulatory oversight of the cotton market from CFTC Commissioner Michael Dunn. These reports could have an impact on both trading and price action in coming weeks, and will warrant close attention.

Weekly Commodity Market Recap: Cotton

2009-12-28T10:12:00.004-05:00

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The holiday-shortened week saw a flurry of reports from around the globe that worked to tug the cotton market higher and lower, resulting in another week of little net change in cotton prices headed into the final trading week of the year. Over the last month, nearby cotton prices remain constrained to a relatively narrow 478-point trading range, with prices retreating three of four days traded last week closer to the lower end of that range. Even so, at 73.65 cents/lb, last week’s close suggests that cotton prices are poised to finish the year higher eight of the last nine months, with the highest monthly close in more than a year and a half.

Helping drive prices higher, reports last week added to sentiment of improving demand around the world. Evidence here shows cotton imports into Thailand—the second-largest cotton-consuming market in Southeast Asia—soared at the fastest pace in four years, spurred on by a re-strengthening currency and robust demand for cotton yarn exports. Fiber and textile prices in China here climbed to a 13-month high as output in the world’s largest textile producer re-accelerated even further. Similarly, Indian cotton textile production here jumped at a double-digit pace in October—the biggest increase in two and a half years—spurred on by the first year-over-year increase in textile exports in over twelve months. Further downstream, Canadian clothing store sales detailed here rose for the first time in thirteen months in October, supported by improving economic conditions in our neighbor to the north.

But to be sure, not all measures of demand last week were optimistic, offsetting the enthusiasm for higher cotton prices. Here, a streak of successive declines in German textile exports over the last two years is likely to drag textile output in this market to the biggest drop on record in 2009. And annualized mill consumption of cotton in the U.S. sank for the 23rd straight month in November here, falling just below the latest USDA projection for 2009/10, suggesting this forecast may be mildly overstated. U.S. cotton exports also continue to fare poorly in the latest week, and remain well off the pace necessary to reach the latest USDA forecast of 11.0 million bales this marketing year. Adding to the bearish concern, the latest data show Russian cotton yarn and fabric output are both likely to see a record plunge in 2009, with volume falling to the lowest levels years. And finally, while data from MasterCard Advisors' SpendingPulse estimated U.S. holiday sales expanded 3.6%, the report showed lower sales of women’s and specialty apparel, echoing our concerns for the crucial holiday shopping season here.

These offsetting signals add to the market’s hesitation and lack of clear direction in recent weeks. And after climbing each of the last three weeks, the dollar wavered last week, further clouding the outlook. We continue to think price may be near the bottom of its recent consolidation range, and may trade modestly higher into the New Year. But longer term, we look for U.S. spring cotton plantings to jump at a double-digit rate from last spring’s low, suggesting increased supplies will help counter the global trend of improving demand prospects in many markets, moderating the long-term uptrend in price.

Weekly Commodity Market Recap: Cotton

2009-12-21T10:35:00.006-05:00

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As the holidays approach, the U.S. cotton market remains relatively quiet, locked in a narrow 240-point range over the last month, with little fundamental news of substance to steer price higher or lower in recent days. In the bears’ camp, most commodities were on the defensive last week as the dollar index rallied from its lowest level since August 2008 to a three-month high. Corn, wheat, and soybean each edged lower last week as the greenback rose for the third straight week. Also, a Memphis-based forecasting group released one of the first crop outlooks for 2010, calling for domestic cotton acres to expand about 10% from this year’s quarter-century low to 10.0 million acres. And while the longer-term outlook for the global textile complex continues to improve in the wake of last year’s economic contagion, several markets around the world still saw output fall again in the latest month—albeit at slower rates—postponing any premature calls of the end of the global textile recession.

The bulls take comfort from a few bits of news last week, offsetting the bears’ momentum and keeping cotton prices range-bound. Retail apparel markets in several countries continue to percolate, suggesting better, frothier days lie ahead. And news from China indicates that output in most sectors of China’s textile behemoth continues to re-accelerate, shaking off the lingering effects of last year’s slowdown. Shorter term, we are wary of choppy trading on holiday-induced lower volumes as the market trudges through this latest consolidation pattern. We remain cautiously bullish on price in the medium term, but believe the outlook for increased global plantings longer term will suppress the market’s exuberance for higher prices into the spring.

Weekly Commodity Market Recap: Cotton

2009-12-14T11:23:00.008-05:00

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The cotton market digested a slew of new data last week ranging from tighter raw cotton fundamentals to lackluster domestic clothing store sales, but offsetting sentiment left futures trading relatively listless and little changed for the third straight week. The market began the week on a sanguine note following upbeat reports of improving retail demand in Germany here and France here, two of Europe’s largest apparel markets. Double-digit growth across most sectors of China’s textile industry propelled textile prices here to the highest levels this year, contributing to the bullish sentiment. Coupled with the first growth in textile and apparel output in Turkey in over a year and a half here, global textile markets are as optimistic on the future as they have been in two years.

But perhaps a telling event came Thursday on the release of the latest USDA supply/demand forecasts for this marketing year. While the lower-revised ending stocks exactly matched FCStone forecasts here and produced the most bullish stocks-to-use ratio in over a year and a half, the market effectively shrugged off the news, with futures stalling against overhead resistance and probing for underlying support. Pundits argue that the market may have already factored in these fundamentals. In fact, breaking news reported here last week that China would distribute quotas in April 2010 for another million tons of cotton imports did little to move the market. It seems no bullish news is able to drive futures higher, suggesting overbought conditions and a pending correction. Of course, funds simply may be taking money off the table prior to the year end, contributing to the lack of upward movement in price. Or the recent rebound in the dollar to seven-week highs may be hindering enthusiasm for higher fiber prices. Regardless, the stall has us concerned.

We won’t rule out that a dip may occur, but sentiment remains increasingly bullish both from the trade and speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain lackluster until after the New Year. Looking further into 2010, we also remain cautiously bullish through the winter, but acknowledge that a likely rebound in cotton plantings in the U.S. and China here this spring may temper enthusiasm for even higher prices that are already well above their long-term average.

Are ICE and ZCE Cotton Futures Poised to Strengthen Further in Second Half of 2009/10?

2009-12-09T17:20:00.011-05:00

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After the unprecedented spike in global cotton prices witnessed in 2008 and the resultant shockwaves felt thereafter across the global cotton market, prices in 2009 returned to levels more in line with traditional influences. These drivers include factors internal and external to the cotton market, and show strong correlations to futures prices. Looking ahead to 2010, these signals suggest cotton prices are likely to remain firm, above their long-term average level, as the global economy re-accelerates from a tumultuous 2008, driving renewed growth aggregate demand for cotton textiles and apparel.

Perhaps one of the most influential drivers on global and U.S. cotton prices is fundamental analysis. The study of the ebb, flow and interaction of supply and demand yields insight into current price levels and can hint at the future direction of price. A measure of this interaction, the stocks-to-use ratio, is often strongly correlated with price. More specifically, the tighter or looser the ratio between anticipated ending stocks and expected demand changes, the higher or lower we can expect price to trend. This relationship is evident in the graph below, showing that in recent months, the forecasted stocks-to-use ratio for the U.S. cotton market has fallen, or tightened. As this has occurred, the monthly average futures price has risen in tandem, breaching 70 cents per pound over the first few days in December.

Analysis of the stocks-to-use ratio can yield important clues to the future direction of price. For example, the USDA’s November forecasted stocks-to-use ratio for the 2009/10 marketing year is 35.2%, the smallest ratio in fourteen months. Not coincidentally, November’s average prices for nearby cotton on ICE Futures U.S. were 68.73 cents per pound, the highest in fifteen months. Reports of likely changes in supply and demand can cause this anticipated ratio to rise or fall, in turn driving price lower or higher in tandem.

Looking ahead to 2010, we expect the U.S. stocks-to-use ratio to tighten further in coming months, suggesting price could strengthen even further. We base our forecast on prospects that the U.S. harvest size may be smaller than currently projected, and on the belief that U.S. exports may outpace the current target in the remaining months of this marketing year. Certainly, this bullish outlook is tempered by the notion that prices already outpace the level suggested by this historic relationship. This implies that any continued appreciation in futures prices may not be commensurate with continued declines in the stocks-to-use ratio. Regardless, we look for the market to remain firm well through winter, perhaps until attention turns to the outlook for higher cotton plantings again in the spring.

Looking more broadly across the U.S. economy, factors external to the cotton market are also having a strong influence over cotton prices. First, the weaker U.S. dollar is boosting the outlook for a host of exportable commodities, including cotton. Both the dollar and cotton prices moved in lock-step over the last two years and presently stand near levels not seen in sixteen months. The outlook for the dollar in 2010 is dependent upon myriad factors both in the U.S. and abroad, including the outlook for interest rates, capital markets, inflation, government policies, and other economic indicators. While it remains impossible to accurately forecast the value of the dollar, we, along with many other market observers, remain pessimistic on the prospects for the greenback, helping support the outlook for a range of commodity prices, including cotton.

Second, speaking of capital markets, cotton prices have had an uncanny correlation with equity prices in the U.S. recently. As darkening clouds over the U.S. economy grew more ominous in the final months of 2007, stock markets in the U.S. began a hasty retreat as investors moved money to safer investments. After peaking in October 2007, the Dow Jones Industrial Average lost more than half its value over the next year and a half, falling to its lowest level in a dozen years. Since then, the Dow has posted one of its biggest rebounds in history, soaring roughly 50% from its March 2009 low. The Dow now sits near its highest level in fourteen months. Similarly, after spiking to the highest level in years in early 2008, cotton futures prices plunged more than 60% over the next eight months to 39.14 cents per pound, the lowest level in more than six years. Since then, nearby cotton prices have steadily climbed, surpassing 70 cents for the first time in sixteen months. Similar to gauging the value of the dollar, forecasting stock prices naturally is next to impossible. But many analysts agree that the impressive jump in the Dow in 2009 is unlikely to be duplicated in 2010, suggesting that any continued re-strengthening in cotton prices is likely to come at a slower rate than witnessed this year.
Aside from fluctuations in cotton supply and demand and factors external to the cotton market, the sales of merchants and positions of large traders and funds in the market continue to be strongly correlated to cotton prices. Week-to-week on-call sales across all contract months continue their co-movement with nearby cotton futures over the last two years. In fact, less than two months ago unfixed call sales reached 54,135 contracts—their highest level in fourteen months—at the same time that weekly nearby prices surpassed 68 cents, the highest level in sixteen months. In the weeks since, a gap opened between the two measures. But we look for this divergence to narrow in coming months, whether in the form of lower cotton prices or higher unfixed call sales. Given the bullish other factors noted earlier, we are more confident that unfixed call sales will slowly expand to fill that gap.

The role of hedge and index funds is likely to remain integral to commodity prices—including cotton—well into 2010. The increasing prevalence of long-only commodity indexes and the increasing acceptance of commodities as an asset class are helping drive interest—and therefore volume—in this area, boosting prices. Likewise, the prominence of agricultural commodities in these indexes has substantially increased in recent years. The cotton market has enjoyed a relatively consistent share of the surge of index and hedge fund monies into the market over the last two years, supporting price. In fact, for well over two years, the ebb and flow of index funds’ net positions have mirrored the rise and fall of cotton prices. Just as the net position of index funds is hovering near a fourteen-month high, so too are cotton prices. Looking ahead, aside from political wrangling over new bills governing increased transparency for some larger market participants, we see little reason to expect the inflow of hedge and index funds to ease in 2010, supporting an outlook for robust price in the months ahead.

Lastly, we turn away from the U.S. futures market to the impressive performance of cotton on the Zhengzhou Commodity Exchange. Since commencing trading on the ZCE over five years ago, cotton futures prices have trended in step with their American counterparts, reflecting efficient market-clearing and price-discovery mechanisms in place in both markets. Clearly, the issues that impact price in one market are felt half a world away, driving price in the other market.

This relationship has been particularly evident over the last year, when prices on both the ICE Futures U.S. and the ZCE exchanges reached near-term lows on virtually the same day. Since then, nearby prices on both exchanges have risen in step with one another to the highest levels in roughly fourteen months. It is only over the last month that ZCE cotton prices continued to climb, far outpacing gains on the ICE and peaking recently at record levels just as market volume also soared to more than 500,000 contracts, also a record. This surge in price easily outpaces gains in downstream intermediate yarns and fabrics and appears inherently inflationary—and therefore unsustainable. While we are optimistic on the prospects for continued strength in global cotton prices into 2010, we are not as confident ZCE prices will be able to maintain such a premium. We expect that any continued gains in ICE futures prices are unlikely to be met with commensurate increases in ZCE prices. And should this sudden spike in ZCE volume and open interest suddenly plunge, we would expect Nearby prices in China to retreat closer in line with U.S. futures prices in coming months.

Weekly Commodity Market Recap: Cotton

2009-12-07T11:56:00.005-05:00

Bullish internal influences grappled with bearish external drivers last week, keeping cotton mired within the previous week’s trading range. In the global cotton market, supply and demand indicators both hinted at tighter fundamentals in coming months. In the U.S., an early-season snow here blanketed much of the remaining unpicked northern cotton crop from New Mexico across the Mid-South. While this snow did not last long, this year’s crop is the latest on record and any remaining fiber still in the field is likely to see big increases in boll rot and declines in yield and quality in wintry weather increases. Across these states, only about 10% of the crop remains in the field, accounting for roughly 300,000 bales.

Globally, voices in Pakistan and India are adding to the growing chorus calling for all-out bans on cotton exports from both countries. Local industries in both markets are concerned over intensifying shortages of fiber and yarn here, prompting calls to both governments to take action. While we do not expect either administration to implement these requested bans, both governments will be obliged to listen to the concerns of the industries and may offer some token policy to encumber exports and placate the industries, either in the form of additional registrations or new export levies. While not as severe as an all-out ban, this action would remain bullish for global prices.

On the demand side, U.S. export sales were phenomenal for a holiday-shortened week, even if shipments lagged the pace we would have like to have seen. Net upland sales reached 250,700 running bales, the most in more than three months. China remained the dominant buyer, followed by strong sales to Turkey and surprisingly to Brazil. We are anxious to see if this jump will continue next week, or if mills are guilty of panic buying once again.

Speaking of textile mills, the weekly Cotton On-Call report here raised a few eyebrows. After falling for five straight weeks, unfixed on-call sales made by merchants to textile mills increased by 3,612 contracts last week and now stand at 49,582. Meanwhile, unfixed on-call purchases mills have made from growers grew only 92 contracts to 9,064. The March contract shows a greater imbalance, with unfixed on-call sales increasing 5,413 to 21,111 while on-call purchases fell 360 to 3,258 contracts. If mills are not proactive about fixing their March cotton, it is not entirely out of the question that we may see another bullish repeat of the December situation where mills need to fix, and there are few sellers left right before first notice day arrives.

Outside the cotton markets last week a stronger dollar, a retreat in crude oil prices, steep losses in gold futures and weak prices for grains all weighed on cotton futures. In spite of the bullish influences noted earlier, nearby cotton futures sank two points from the week before to 73.82 cents as these external factors weighed on price. Late in the week, a rally in the dollar, spurred by thoughts that interest rates may rise sooner rather than later after the economy lost a much fewer-than-expected 11,000 jobs last month, exerted broad influence on commodities. NYMEX oil sank to $75.47 last week, its lowest weekly close in two months. After soaring thirteen of the last fifteen weeks to a record high last week, gold also lost some of its luster following a Friday sell-off, sinking well below $1,200/ounce. Alternative crops also wilted under the dollar pressure. After reaching a six-month high last Monday, nearby wheat futures fell each of the next four days, trending lower in step each day with lower corn prices. As these opposing forces jostle for the dominant influence over cotton prices, we still look for the market to move higher, just not quite yet.

Weekly Commodity Market Recap: Cotton

2009-11-23T11:06:00.001-05:00

Cotton futures rose last week to finish at the highest close in sixteen months, owing to factors both internal and external to the market. Internally, projected supply and demand trends continue to point to higher prices. In the U.S., damage from the remnants of Tropical Storm Ida is likely to pare back domestic production prospects across much of the Southeast even further. Season-to-date, less than five million bales of cotton have been classed—hardly 70% of this point last year—suggesting production is likely to fall well short of last year’s 12.8 million-bale crop. Elsewhere, India’s Cotton Advisory Board added to the growing cacophony of analysts believing the local crop is likely to be smaller than earlier forecasts. At 23.0 million 480-lb. bales, their latest projection is well below the USDA's 24.25 million-bale November projection. And in China, a first look at the quality of this season’s crop shows length, micronaire, and grade are all poorer than by this point last year, suggesting demand for better-quality foreign growths may pick up in coming months. Also in China, the market shrugged off news of a third round of reserve auctions by the NDRC, with the nearby ZCE cotton contract surging limit-up in its last session to the highest close in over a year and a half. Clearly, the bulls are having their way with the market over recent weeks.

Outside the cotton market, re-strengthening in the broader commodity complex is helping buoy cotton prices. At 75.07, the dollar is teetering on the edge of falling to its lowest level in more than fifteen months, spurring a broad array of commodity prices, including cotton. The Reuters/CRB Index is flirting with its highest close in fourteen months, while gold stands at a record, more than $1,170/ounce. And recent news of existing home sales jumping much more than expected to the highest level since July 2007 is likely to bode well for the outlook for demand for cotton home textiles, further supporting the bullish sentiment behind higher cotton prices.

Weekly Commodity Market Recap: Cotton

2009-11-16T10:10:00.001-05:00

Unfolding events last week generally were friendly to the market, helping nearby cotton futures reach the highest daily close in fourteen months, before a collapse in technicals settled the week’s activity with little net change from the previous week. The remnants of Hurricane Ida drenched open-boll cotton from Alabama to Virginia last week, with pockets receiving up to eight inches of rain in hardly 48 hours. In particular, the North Carolina crop, which had been expecting record yields prior to the arrival of the storm, roughly 330,000 potential bales of cotton still on the stalk in the state were exposed to excessive rainfall, strongly suggesting quality may be seriously compromised as a result. Gusty winds later in the week then blew much of the heavy, soaked bolls to the ground, where they are unable to be harvested, implying yields in the state also may suffer.

Tuesday’s release of new supply/demand forecasts from the USDA generally mirrored our forecasts here, showing an outlook for tighter fundamentals, both in the U.S. and worldwide. A 502,000-bale decline from just last month in the anticipated size of the U.S. crop is likely to result in the smallest harvest in two decades. Similarly, the USDA shaved another million bales off the size of the Chinese crop for the second straight month, while historic revisions to Bangladeshi cotton consumption propelled mill demand there to a record 4.0 million bales this year. On balance, lower production and higher demand reduced projected ending stocks from last month both in the U.S. and worldwide, resulting in tighter stocks-to-use ratios, fundamentals friendly to prices. Accordingly, nearby futures closed Tuesday at 75.11 cents per pound, matching the highest close since August 2008.

Technical trading ruled later in the week, with cotton receiving little, if any, assistance from outside markets. Nearby futures moved in mirror-opposite step to the dollar each of the last nine sessions, and settled lower in the second half of the week as the dollar rebounded off fourteen-month lows. After climbing to a fourteen-month high in late October and establishing firm resistance, cotton prices remain constrained to a three-hundred point trading channel over the last few weeks. In the shorter term, we look for the market to take a second look at support levels at 69.75 and 68.80 cents per pound before challenging Tuesday’s fourteen-month high of 74.27 cents in the longer term.

Weekly Commodity Market Recap: Cotton

2009-11-02T10:38:00.001-05:00

Cotton prices crept higher last week, as concern over the outlook for yield and quality of the Mid-South crop outweighed bearish influences from outside markets. As we feared here, the month concluded as the wettest October in over a century for much of the Delta area planted to cotton, causing the most delayed harvest on record. Additionally, the drenching showers in Delta cropland is impacting quality of the crop, ranging from boll rot and yellowing of the cotton fibers to lower average strength detailed here. While producers in the region are likely to rapidly advance picking under clear skies in the coming week, the damage has been done; the next USDA crop report in a week is likely to show a dramatic drop in the size of the Mid-South cotton harvest, buoying cotton prices.

In the shorter term, price action is likely to remain choppy, as the market ebbs and flows between good and bad news on the economy. Traders were quick to dismiss Thursday’s news of robust expansion in third-quarter U.S. economic activity, after Friday’s disappointing spending data and considering the skewed effect from government spending and one-time stimulus measures in the housing and auto sectors. On balance, the dollar is solidly up from its fourteen-month low set a week ago, hindering continued gains across a wide range of commodities, including cotton.

Total open interest has been on a tear recently, expanding to over 185,000 contracts by late October, the highest in over a year. Not coincidentally, this comes as nearby cotton futures finished last week at their highest weekly close in fifteen months. Even so, speculators widely believe cotton is undervalued, and torrential, record rains across U.S. Delta cotton is compounding speculator resolve. Technical traders see rising prices and open interest and believe another push up is coming. While open interest is at its highest level since October 2008, we note that market open interest stayed above current levels for twenty months prior to last October, suggesting the market may have much longer to persist at or above these levels.

Weekly Commodity Market Recap: Cotton

2009-10-26T11:13:00.003-04:00

After climbing five of the last seven weeks to the highest level in fourteen months, nearby cotton prices stayed range-bound last week within the limits set last Monday as traders wrestled with an outlook for both lower supply and demand. After dropping 174 points last Monday from the prior week’s close, futures prices spent the week within a 250-point range as harvest concerns in several markets weighed against news of lower demand for U.S. cotton. Too much rain in Mid-South states here continues to plague production prospects in the region, delaying harvesting to the latest in history. With each passing day, the outlook for cotton yield and quality are eroding in the region. While low temperatures have remained above freezing in most of the south, prospects for the crop will dim rapidly once wintry conditions set in.

Similarly, inclement harvest weather in China is calling into question earlier optimistic forecasts for the crop size. In China’s Xinjiang province, freezing temperatures and the first snowfall of the season here are accelerating picking before harsher conditions set in. Also recently the China Cotton Association drastically reduced its anticipated harvest size by 2.5 million bales from the previous month’s forecast to 30.8 million bales, with Xinjiang production down 14-15% from last year, leading the decline.

Demand issues also weighed on the market, helping temper the streak of bullishness over recent weeks. U.S. mill consumption in September fell to a record-low 2.9 million annualized bales here, well below the latest USDA forecast for 2009/10 of 3.4 million bales. And weekly export sales and shipments fell to a marketing year low for the week ending October 15, suggesting cumulative shipments in 2009/10 remain behind the pace necessary to reach the latest forecast.

News of lower supply and demand last week worked to offset one another, leaving prices to trade within Monday’s range all week. By Friday, futures closed 83 points lower from the week before at 67.38 cents per pound. The weekly Spec/Hedge report showed that the spec long position grew to 18.5%, up 4.1 percentage points from the previous week. As the spec long position grows, so has open interest in cotton futures. By the close of business Thursday, open interest had risen to 180,635 contracts, strongly suggesting money is flowing into the cotton market.

Looking ahead, data on home sales, consumer spending, and a first look at third-quarter GDP will set the tone for economic releases for the week. After seeing the dollar plunge to a fourteen-month low last week, these data coupled with new retail sales data and an interest rate decision in Japan are sure to sway the greenback in coming days, with most commodities—including cotton—sure to respond in kind.

Weekly Commodity Market Recap: Cotton

2009-10-19T11:45:00.004-04:00

Buoyed by supply concerns and bullish outside influences, cotton prices extended their impressive streak of gains last week, rising to the highest levels in more than fourteen months. December futures rose for the eighth time in ten sessions Friday, up more than 750 points over the last two weeks. At 68.21 cents per pound, the December contract finished the week up for the fifth time in the last seven weeks as the bulls clearly dominated the news.

Concerns continue to mount over harvest prospects in several markets. In particular, Delta cotton fields in the U.S. remain soggy from persistent rains over the last month, hindering and delaying harvesting. Evidence here shows near-record rains fell over recent weeks in the area, and are likely to damage yield and quality to cotton from the region. Also, after suffering through its third summer of drought, recent downpours in California discussed here have come at a most unwelcome time, with virtually all the cotton bolls open, but hardly 6% of the crop harvested. Adding to the dismal outlook, Hurricane Rick in the eastern Pacific here may complicate harvests in Texas closer to the weekend, further compromising the U.S. crop.

Too much rainfall also remains a concern in China, where futures prices are flirting with their highest levels in almost a year and a half. Several eastern provinces report delays in harvesting and damage to quality from untimely rains, driving local prices higher. In fact, even with prices continuing to firm, evidence here shows many producers remain reluctant to sell, expecting prices to rise further. Recently-revised forecasts promulgated within the country here point to lower production and higher demand, supporting this sentiment, boosting domestic prices.

Even away from the fundamentals, other signs point to continued strengthening in price. The dollar continues to sink lower, plunging to its lowest weekly close in fourteen months, helping boost a wide range of commodity prices. Cheerful words from the Fed and the Treasury are doing little to turn investor sentiment back to the dollar, particularly after last week’s news of a record $1.4 trillion deficit in the U.S. Also, money flow into cotton has been impressive and open interest is exploding. New speculative money matched up against new commercial hedging has amplified the expansion of open interest. And unfixed call sales reported here in last week’s Cotton on Call report rose to a thirteen-month high, supporting continued gains in price.

This string of higher closes is reminiscent of the period two years ago when futures began their march to the highest levels in years, culminating in the March 2008 spike. While this is not the same market—with the same outside influences and hysteria driving prices higher—the trend remains firmly with the bulls, even as the bears point to the need for a correction. For now the market has some strong upward momentum.

Weekly Commodity Market Recap: Cotton

2009-10-12T10:56:00.002-04:00

After retreating the two previous weeks, cotton prices firmed last week, supported by external and internal factors that were friendly to the market. Nearby cotton prices in the U.S. rose 236 points on the week to finish at 63.02 cents per pound, the highest close in three weeks. Outside influences boosting cotton futures included rebounding stock and commodity prices and a weaker dollar, while the internal factors of tighter supply/demand estimates from the USDA and higher unfixed call sales helped reverse last week’s slide.

Exogenous factors continue to have a large influence over the cotton market. Cotton prices responded to an improving stock market, as the Dow Jones Industrial Average gained 372 points on the week to flirt with its highest level in a year. Higher prices for key commodities also helped boost cotton futures. Corn, soybean, and wheat all saw solid gains on the week, as prices in the broader commodity complex rose in response to a weaker dollar. The CRB Index of nineteen raw materials saw its biggest weekly jump since the spring, finishing at its highest weekly close in two months. Speaking of the dollar, the greenback sagged further last week on speculation the Federal Reserve will trail other central banks in raising interest rates, making the currency less attractive. A rising cacophony of voices around the world questioning the reserve status of the dollar doesn’t help bolster sentiment for the currency, either.

Improving fundamentals more directly tied to the cotton markets also pointed to firmer prices last week. As we expected here, a report from the USDA anticipating smaller ending stocks domestically and worldwide this marketing year helped buoy prices. Here the USDA lowered the projected harvest size in the U.S. by 440,000 bales from last month, with most of the decline coming from Texas. This leaves us believing production may decline further in coming months, as many analysts are looking for lower yields and quality from Mid-South states. Worldwide, production forecasts here sank 1.3 million bales from last month, with the Chinese harvest withering by one million bales. Additionally, the latest volume of “on call’ positions reported by merchants here jumped to the highest level in more than a year, carrying cotton prices higher. At 50,423 contracts, unfixed call sales outnumber unfixed call purchases by more than three-to-one, the widest gap in more than a year.

Looking ahead, we are mildly bullish in the short term. We continue to feel the damage to the Mid-South crop is not fully reflected in the U.S. production outlook. Further, there is more adverse weather in the forecast, which doesn’t make physical traders necessarily bullish, rather more hesitant to be very bearish. Speculators are just plain bullish and appear ready to exact continued pressure on the unfixed spinners. We look for December to have room to strengthen further in coming weeks, likely beyond near-term resistance levels.

Weekly Commodity Market Recap: Cotton

2009-09-28T11:32:00.002-04:00

After rising each of the previous three weeks, cotton futures retreated last week on weaker outside influences, fund selling, better harvest weather, and bearish technical signals. After cresting at the highest level in more than a year, nearby prices dropped 124 points on the week to 61.94 cents per pound, pulled lower by Friday’s nearly limit-down close. The broader commodity complex saw general weakness over recent days, as the CRB Index eased lower for the week. This broad-based weakness weighed on cotton prices as the dollar posted a modest recovery last week. After falling to a 13-month low, the U.S. Dollar Index rebounded late in the week to a three-week high before settling at 77.02, up 35 points on the week. Also, confirming the relationship we showed here, weaker equities took a toll on the cotton market. After climbing to its highest level in almost a year, the Dow Jones Industrial Average slipped last week, dragging cotton prices lower. Weaker commodity prices, a stronger dollar, and lower stock prices together cast a pall over the cotton market, helping drag every contract month for the next two years lower for the week.

Fund selling also contributed to weigh on cotton prices last week. Mirroring the rise in cotton prices over the last year, index funds’ net position rose to 75,219 contracts a week ago, the highest in twelve months. This left the market vulnerable to a setback that we suggested here. Accordingly, last week’s fund selling drove this net position lower to 74,741, prompting the exit in the market late in the week.

Weather has turned much more favorable across the U.S. cotton belt in recent days, improving the yield outlook from earlier in September. While the Delta and areas of the Southeast received heavy rains over the previous two weeks here, conditions turned drier this weekend and are expected to remain mostly dry for the week. The forecast for the next few days here has the Delta and Southeast warming up and drying out, which should promote boll opening and early harvesting. In West Texas, warmer, sunny conditions will prevail this week. While the recent deluge in rains slowed the development and harvesting of the crop, the warmer, dry days this week will be welcome across the Belt.

Weaker technicals also pressured cotton prices lower on the week. By climbing to a new high only to falter to a low by the end of the week sets up a bearish outside range reversal to the downside and hints at additional selling early this week. A hook reversal late in the week added to the bearish sentiment. And after signaling overbought conditions by breaching the critical 70-level on the RSI late the week before, lower prices reduced this indicator to a more moderate range. The market has been due for a correction, and last week's activity seemed to show just that.

Weekly Commodity Market Recap: Cotton

2009-09-21T11:43:00.004-04:00

Cotton futures continued their impressive move higher last week on new bullish fundamental and technical signals, with Nearby prices rising for the third straight week to the highest close in more than a year. The most-traded December contract extended its streak of daily gains to twelve straight days, the longest streak in the contract’s life. Last week’s strength in the cotton market came from both internal and external influences. Worries over crop prospects in the U.S., China, and the Indian subcontinent combined with a weaker dollar and firmer stock market helped buoy prices. Rainy weather in the Delta and Southeast here are raising yield and especially quality concerns for the U.S. crop. Similarly, too much rain in Anhui here and Shandong here are suspending cotton procurement and likely to negatively impact crop yield in these key Chinese provinces. Conversely, a premature end to an already lackluster monsoon in India here prompted the USDA recently to pare back its forecast for the Indian crop by one million bales, limiting output in the country that plants more land to cotton than any other. And extensive damage from insects and leaf curl virus in Pakistan here are likely to prompt increased need for foreign cottons in the world’s third-largest import market in coming months. These bullish fundamental signals helped push futures prices on every contract month higher last week, with the Nearby closing at 63.18 cents per pound, its highest finish since September 2008.

Outside influences also are helping support cotton prices. Since reaching a near-term high in March, the dollar remains on its slippery slide, falling against a basket of currencies. The U.S. Dollar Index closed down last week for the third straight time, falling to 76.67, its lowest close in more than thirteen months, driving commodity prices higher.

Mirroring similar relationships noted in other commodities, cotton is also enjoying a rebound in prices from the lift in equities. Since reaching a near-term low six months ago, the Dow Jones Industrial Average closed up again last week, reaching 9,838, the highest point in almost a year. This bottom, inflection point, and subsequent rise mirrors a similar trend in Nearby cotton prices. Several technical indicators—particularly the RSI—are showing overbought conditions. And with a global stocks-to-use ratio likely to be only modestly tighter from last year, we are not confident the market can justify prices much above these levels. Accordingly, we look for prices to ease in the near term as harvest reports begin to accumulate over the next month.

Weekly Commodity Market Recap: Cotton

2009-09-14T15:41:00.002-04:00

Last week’s cotton market saw Nearby ICE prices climb for the second straight week as more signs of improving demand are emerging, but an unimpressive WASDE report from the USDA, better yield prospects in several countries, and seasonal pressures may temper price gains in the near term. Nearby prices on the ICE Futures U.S. exchange rose late in the week for the ninth time in the last eleven sessions, trading over 60 cents for the first time in almost a month. Similarly, most-traded December closed up for the tenth time in eleven days, finishing the week at 61.24 cents per pound, the highest close since August 13.

Hints at improving demand are taking root around the globe, buoying price. China’s Keqiao Textile Index—a gauge of textile and fiber prices—rose for the fifth time in six weeks last week here as traders are becoming more confident of an improving outlook. August yarn production in China—a proxy of cotton mill usage—rose 12.7% from a year ago to 2.1 million tons, extending its streak of gains. Further downstream, retail apparel sales rebounded in a number of markets, supporting the gains in textile output. France, Australia, Brazil, and Germany all reported improved consumer demand for clothing in the latest month. While we expect gains in retail demand to remain tepid in coming months, we look for the improved demand to spread to more countries as markets rebound from a tumultuous last year.

At the same time, supply-side signals may hinder the continuation of the recent streak of firmer prices. Trading activity last week saw the latest release of supply/demand forecasts from the USDA, a report generally viewed as neutral to the market. In the U.S., anticipated higher production and exports offset one another, resulting in no net change in expected ending stocks in 2009/10. But more recently, continued downpours across much of Texas are likely to boost yield potential around Lubbock in coming weeks. Globally, a million-bale decline in Indian production and no sizable change in demand tightened the anticipated world stock-to-use ratio as we expected here. Lastly, seasonal harvest pressures will likely start weighing on the market soon, particularly if crop conditions continue to improve. For these reasons, we not as confident that the streak of steadily higher daily closes will persist for another week as boll opening accelerates and harvest commences.

Weekly Commodity Market Recap: Cotton

2009-09-08T10:18:00.008-04:00

After retreating for three straight weeks, cotton prices managed to post a modest rebound last week, buoyed by a weaker dollar and indications that consumers might be set to start shopping again as the holidays approach. But supply-side pressures on the crops in major producers may limit this bullish sentiment in coming days as the market awaits the newest crop report from the USDA later this week.
Cotton prices extended their gains late last week on the back of a weaker dollar. Since finishing last week near the low end of its recent trading range, Nearby cotton futures are up six of the last seven sessions, closing last week at 57.53 cents per pound. Despite losses last week in grains, a declining dollar continues to support cotton prices. The greenback slid for the seventh time in nine weeks, threatening to fall to its lowest level in a year. The Dollar Index on ICE Futures U.S. eased to 78.14 Friday as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven. Cotton prices’ negative correlation against fluctuations in the dollar has been particularly impressive over the last year and a half, hinting that if this relationship persists, there may be more upside potential for cotton in coming weeks.

Adding to this bullish support are indications that consumers might be preparing to start shopping again, just in time for the holiday shopping season. Although sales were down again in August at most U.S. apparel retailers here and the unemployment rate rose to a 26-year high here, they were not as bad as expected, putting some tentative hope in the market. However, we are not as optimistic, and look for same-store sales at most clothing retailers to continue to post losses—albeit at a slower rate—in coming months, with comps roughly flat by Christmas.
On the supply side, the market is still waiting for a better indication of this year's crop in the world’s largest cotton-producing markets. The U.S., India, and China each have had some challenges this year, but have managed to wriggle through them without noticeably large problems resulting. South Texas cotton remains parched, with total agricultural losses in the state here approaching a record $4.1 billion. Some eastern provinces in China saw damaging wind and rain from Typhoon Morakot here. And India received unimpressive monsoonal rains earlier this summer, only to enjoy late-season onset of ample precipitation here. However, the stress put on these crops, mostly due to swings back and forth from very dry to very wet conditions, could end up causing lower yields. Traders will likely be hesitant to carry prices strongly higher or lower until they get a better idea of the crop size in the latest USDA report due at the end of the week.

Weekly Commodity Market Recap: Cotton

2009-08-31T12:48:00.005-04:00

New York cotton futures finished their third straight week of declines on cues from outside markets, falling to the lowest weekly close in more than two months. This marked the third consecutive week of lower closes, the longest such streak since a four-week losing stretch that ended March 6.

Nearby prices closed Friday at 56.30 cents per pound, hampered by weaker signals from traders and declines in outside markets. First, the weekly Cotton on Call position report from the CFTC showed a decline in total unfixed call sales to 44,188. This came primarily from the most-traded December contract, where unfixed call sales retreated 533 contracts from the previous week’s record high to 17,253.

Also, the latest spec/hedge report from ICE Futures U.S. added to the glum mood over the market last week. The spec/hedge report for the week ending August 24th showed speculators reduced their net long position from 12.2% to 8.7%. Overall spec longs likely sold their positions to the trade, as spec longs reduced their position by 6,057 contracts to 49,476. Finally, the latest net futures position from the CFTC’s Commitments of Traders report dipped to 24,004 contracts Friday, its lowest weekly close in almost two months. All three gauges substantiate the decline in futures in the latest week.

Outside markets also weighed on cotton prices in recent days. Wheat and corn prices are flirting with multi-month lows, while synthetic fiber prices in China are swooning from near-term highs set a month ago. Nearby wheat futures fell to $4.60 per bushel last week, down each of the last three weeks in step with lower cotton prices. Corn prices fell for the seventh time in the last nine weeks, down to $3.21 per bushel. Even prices of synthetic fiber feedstocks eased in the last week, dampening prices for purified terephthalic acid (PTA) on China’s Zhengzhou Commodities Exchange. Economically speaking, PTA is a substitute good for cotton, meaning fluctuations in prices here tend to mirror changes in cotton prices. As a derivative of oil and an ingredient in polyester production, lower PTA prices point to lower cotton prices. PTA futures dipped for the second straight time last week, down to 7,684 yuan per metric ton (51.0 cents per pound). Despite the lower close in cotton prices this week, we are still friendly to this market, and believe we are near the bottom of our range.

Weekly Commodity Market Recap: Cotton

2009-08-17T11:59:00.001-04:00

Last week’s trading saw U.S. futures end the week down 132 points from the week before, even as most of the week’s news took a modestly more bullish slant, suggesting shorter term there may be more downside potential in price. Last Monday’s open jumped 142 from the previous close, as Typhoon Morakot roared ashore in Taiwan and mainland China’s Fujian province. While the storm brought drenching rains to cotton in Zhejiang, Anhui, and Jiangsu, the impact likely may be more fully felt on shipping delays and slower retail sales growth. Midweek trading continued to see lackluster volume—an issue noted over the last two months—with futures inching higher. With few consequential changes from its July forecast, Wednesday’s August supply/demand report from the USDA was a non-event, with the market effectively shrugging off the report. Friday’s limit-down sell-off in cotton helped confirm our suspicions last week here that the market appeared mildly overbought. Nearby cotton prices fell to 59.21 cents, its lowest close in eight days.

The market continues to be influenced by thin summertime trading, making for more volatile conditions. In coming days, the impact from the first three named Atlantic and Gulf storms may weigh on prices. Already, Claudette made landfall Sunday night over the Florida panhandle and is expected to cut a quick path across to the Missouri bootheel by Tuesday afternoon. After coming ashore, this weak storm weakened more, as is currently classified as a tropical depression over southern Alabama. A stronger Ana may follow a similar path, while it is not expected to come ashore in the Southeast until late in the week. Bill has the most potential to reach hurricane strength, but several models suggest this storm may veer northward and remain well away from cotton in the southeast U.S.

Elsewhere, South Texas remains in the grip of a record drought, while West Texas may see a bumper crop. The 2009 Texas Upland cotton crop is expected to total 5.4 million bales, 21% more than in 2008. Yield is expected to average 701 pounds per acre, compared with 657 pounds last year. Acreage expected for harvest is estimated at 3.7 million acres, up 14% from 2008.

While we are not writing off the Indian crop, the monsoon remains unimpressive across much of the cotton area in India. The below-normal rainfall so far does not bode well for the crop. However, models do indicate that showers may increase over the next several days in some of the drier northern areas. Still, rainfall deficits are expected to linger and negatively impact yields in the world’s largest cotton area.

Weekly Commodity Market Recap: Cotton

2009-08-10T12:35:00.002-04:00

After retreating the previous week in response to overbought technical and fundamental signals, last week’s market posted an impressive rebound, but darkening fundamental clouds this week suggest prices may ease lower in coming days. The futures market jumped 260 points last week, driven higher by a near limit-up move Monday. This jump came in concert with a strong surge from most other key commodities, as the dollar fell to its weakest point this year. Prices Tuesday and Wednesday remained range-bound, only to see a re-strengthening dollar Thursday push futures lower. Spec buying Friday helped the market reach just below 62 cents per pound, the highest level in half a month, but profit taking Friday eased gains, with the week closing at 60.53, just below Tuesday’s close.

Looking to the new week, all eyes will turn to the forthcoming USDA supply and demand report due to be released Wednesday. We anticipate the USDA will turn more bearish in its next report, with looser fundamentals expected in the U.S. and worldwide. We look for the report to show a modest increase in the anticipated size of the U.S. harvest, as steady improvements in the condition of the crop across the cotton belt over the last month boost the outlook. Evidence shows half the U.S. crop is in good or excellent condition, up each of the last four weeks. After averaging 13.25 million bales each of the last three months, we look for the USDA to raise the production forecast to 13.6 million, as higher anticipated yields in the Midsouth and Southeast offset crop damage from exceptional drought conditions in South Texas.
We remain pessimistic toward the prospects for U.S. mill use in 2009/10. While economic activity is likely to rebound in the new marketing year, we are not confident that mill demand for cotton will remain essentially unchanged from the 3.55 million bales recorded this year. We look for continued consolidation in the industry—albeit at a slower pace—and expect the August forecast to ease modestly to 3.45 million bales.

Foreign demand for U.S. cotton is likely to ebb in the new marketing year, suggesting lower U.S. exports. Already, the combined volume of carryover sales and sales for 2009/10 is less than at this point in each of the last several marketing years, suggesting exports next season may be lower. We expect U.S. cotton to maintain its one-third share of global exports, implying shipments may stay roughly flat from July at 10.2 million bales in August. On balance, higher production and modestly lower demand for U.S. cotton is likely to boost anticipated ending stocks. We look for the USDA to revise its August projection for U.S. ending stocks for 2009/10 to 5.9 million bales. Even so, this would still remain the lowest in five years.

Worldwide, changes in global fundamentals are likely to mirror the expected changes in the U.S. We expect the USDA to modestly increase world cotton production, as improved prospects in the U.S. offset a dimming outlook in India. A lackluster monsoon here continues to sprinkle insufficient rains on most of the country, hindering crop development in a country that plants more land to cotton than any other. We look for the USDA’s August forecast to increase to just over 106.0 million bales.

Mill demand for cotton remains lacking in most of the world. After reducing its forecast in June and July, we believe the USDA forecast still remains overstated. While consumption may not dip as low as in 2008/09, we look for slower growth in 2009/10 than currently projected and expect the August forecast to ease for the third straight month, dipping another 600,000 bales to 112.0 million. Similar to the U.S., higher supply and lower demand forecasts imply higher ending stocks. At 58.5 million bales, our expectation would mark the third straight increase from the USDA and the third straight month of gradually looser fundamentals in the market.
The big news last week was the announcement that two of the world’s largest cotton merchants planned to merge, creating a cotton trading behemoth that would sell one in ten bales grown around the world. Thursday Allenberg Cotton Company confirmed rumors that it planned to acquire Dunavant Enterprises Inc. The deal could align two of the world’s leading cotton merchants into a behemoth organization responsible for marketing one in ten bales grown around the world. Cordova, Tennessee-based Allenberg, the largest in terms of both revenue and volume, oversees shipments of more than seven million bales U.S. and foreign growths, with revenues of roughly $2.0 billion. Privately-owned Dunavant handled six million bales last year, with revenues at roughly $1.5 billion. Together, the combined organization could market over thirteen million bales, or more than one-tenth of the global cotton crop.

Weekly Commodity Market Recap: Cotton

2009-07-27T10:12:00.004-04:00

After strengthening for four straight weeks, cotton prices retreated last week, as bearish fundamentals in the U.S. and abroad chased off the bulls that had dominated the market over the last month. Domestically, crop conditions generally tended to improve last week, as key cotton areas of the Southern U.S. largely experienced timely rains last week. Globally, India’s delayed monsoon finally kicked into gear, just as the monsoon season reached its typical seasonal peak. The past several days marked the first week this year in which monsoon rains exceeded the norm, brightening the prospects for late-planted cotton in the country that plants more land to cotton than any other. Similarly in China, timely rainfall and normal hot weather in Anhui and Hebei is benefitting cotton in both provinces, hinting at improved yield prospects in the world’s largest cotton-producing country.

The demand side also saw the bears dominating the news in the last week. U.S. mill demand for cotton continued its long-term slide, with annualized consumption in June falling 26.3% from a year ago to 3.22 million bales, down for the 46th time in the last four years. June cotton fabric exports from both China and Pakistan also shrank, extending declines in both markets and countering tentative ‘green shoots’ of improving demand in yarn output in both markets. Further downstream, the week brought reports of a record collapse in Peruvian apparel exports and the biggest drop in years in clothing shipments from Sri Lanka. In turn, these markets responded to sinking import demand reported in key retail markets last week, including the U.S. and Canada.

For the week, Nearby cotton traded lower three of five days, shedding 471 points on the week. Technical action suggests that the market may have established a near-term top, with cotton completing a weekly outside-range reversal to the downside late in the week. Unfixed on-call sales in December cotton expanded 1,018 lots to 16,859 during the week ended last Friday based on revised data from the prior week, while unfixed call purchases increased 338 lots to 8,876, according to the latest Commodity Futures Trading Commission data. The ratio of potential buying to potential selling edged fractionally higher to about 1.9:1 and the net call difference of 7,983 lots comprised a marginally higher 7.6 percent of December's rising open interest.

Looking ahead to the coming week, the calendar is relatively light on reports likely to directly impact the cotton market. As we approach the end of the marketing year, exports remain underestimated, something we have long argued. But improved weather developments this week could easily counter any bullish sentiment from modestly higher revisions to exports. The dollar is likely to have the biggest impact on the market in coming days, as the government will flood the Treasury market with a record amount of new debt this week, topping $200 billion. Already, the dollar is near its lowest level this year on speculation the global economy is shaking off the worst recession in decades. A weaker dollar could drive commodities—including cotton—higher, reversing last week’s swoon, or a rebound in the greenback could extend the dip in cotton prices, fortifying the near-term resistance set at 63 cents per pound last week.

Weekly Commodity Market Recap: Cotton

2009-07-20T12:03:00.004-04:00

Cotton prices edged higher for the fourth straight week, finishing Friday at 62.10 cents per pound, the highest weekly close since September. Signs from both the fundamental side and trading side of the market support the recent firming in price. While cotton textile production in India, Turkey, and the U.S. remains lackluster, signals in China continue to point to a rebound in downstream demand for cotton. Total yarn production rose to a record 2.2 million metric tons in June, the 22nd year-over-year gain in the last two years. Further downstream, cotton fabric production rose to 2.9 billion square meters in June, also a record. On the supply side, India’s delayed monsoon rains advanced in the latest week, but may be too late to justify such a high level of plantings forecasted by the USDA. Some analysts—including FCStone—believe Indian production this year will fall well short of the 25 million-bale forecast from the USDA. In the U.S., exceptional drought conditions intensified across southeastern Texas in the latest week, withering crop prospects in the Coastal Bend region, something we have long cautioned about.

Spec and fund buying are also suspected as a big influence behind the recent advance in futures prices. Since reaching a new-term low of 105,969 contracts in open interest in late June, open interest in cotton futures climbed more than 20,000 contracts since then, up 18.9%. While open interest of 126,038 contracts pales in comparison to the 302,000+ contracts of open interest in early March 2008, an increase of nearly 20% in open interest in just sixteen sessions indicates that spec and fund money is slowly but surely returning to the cotton market. The recent run-up in U.S. futures prices mirrors the gains witnessed in China. Nearby cotton on the Zhengzhou Commodity Exchange closed the week at the equivalent of more than 90 cents per pound, the highest level in months. The bulls’ argument also points to a falling dollar, coupled with stronger crude oil, gold, and grains prices.

Even so, all these bulls gathering on the bandwagon can tip the market into a correction. While the technicals are not screaming for a correction yet, the USDA threw cold water on the market recently by boosting anticipated global ending stocks by 1.4 million bales. And prospects for a rebound in global mill demand remain based on the outlook for an improvement in the global economy, something we believe will be sluggish in coming, with risks weighted to the downside.

Weekly Commodity Market Recap: Cotton

2009-07-13T11:18:00.005-04:00

Weekly nearby cotton prices on the ICE Futures U.S. closed Friday at their highest levels in ten months, shrugging off the effects from a mildly bearish—but expected—USDA supply/demand report, focusing instead on mounting concerns over delays in the Indian monsoon, sweltering 100+ degree weather across much of Texas, and persistent rumors of new forthcoming import quotas in China. This marked the third straight week of higher closes in futures prices, with the week finishing at 60.39 cents per pound. After closing lower the first three days of the week, Nearby prices roared ahead Thursday and Friday, up a combined 339 points. Most-traded December pierced a six-week high of 62 cents Friday and is poised to challenge resistance below 63 cents this week, the highest point in ten months.

Optimism earlier this season for record yield and production in India is fading with each passing day, as concern grows over a lackluster monsoon season. After its earlier-than-normal arrival, progress of the monsoon across the country has been slower than trend, with most parts of central, north, and northwestern India yet to receive sizable rains. Over the last two months, daily rainfall has only surpassed the average daily rainfall totals nine days, with totals not reaching half of the normal amounts most days. The window of opportunity for planting the Indian cotton crop will close this week, squelching early optimism for hearty yields and adding to the bulls’ fundamental argument for tighter global stocks.

In the western hemisphere, weather issues also are adding to concern about the size of the crop. Cotton areas across most of southeast Texas continue to experience exceptional drought, and no measurable rain is forecast for the coming week. For the ensuing five days (July 14 – 18, 2009), below-normal precipitation is again expected across Texas, hinting at prospects for dismal yields in the area. Without replenishing rains soon, it is doubtful that there will be sufficient water to finish the cotton crop in the Coastal Bend region this season, reinforcing the bullish sentiment.

Finally, demand-side issues are reinforcing the bulls’ position. Persistent rumors continue to circulate of an imminent release of additional import quotas in China. These rumors have loomed over the market for several weeks, seeming to gain additional traction over time. Now, some Chinese mills are confirming that they received additional import quotas. With the new quota estimated to be about 400,000 metric tons (1.8 million 480-lb. bales), this could provide a boost to early-season U.S. exports in coming weeks.

This outlook for a weaker Indian monsoon, higher temperatures in southeast Texas, and new Chinese import quotas enabled the market to rise again in the latest week, effectively ignoring bearish sentiment from the USDA’s latest WASDE report.

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

2009-07-06T10:16:00.007-04:00

For companies thinking cotton is just cotton, the market has some surprises in store. Although the overall quality of cotton globally may be increasing, how the improvement is occurring remains surprising--long staple cotton has expanded to become the dominant type of quality cotton produced today, while at the same time these gains have translated into a decline in Pima and other extra-long staple varieties, and the traditional lower end of the market, generic upland cotton. So what had been the middle of the market has now become more important than ever in understanding the global cotton business.

Indeed, what are the ramifications of such changes? Will cotton become cheaper or more expensive? What about supply versus demand? Will there be shortages or new market opportunities?

To help answer these and other questions, FCStone Fibers & Textiles announces a new multi-client study entitled "The Future of High Quality and Branded Cotton".

With particular focus on China, India, the U.S. and Egypt, this study will examine global supply and demand trends for the major varieties of cotton, the attitudes of buyers and sellers of cotton internationally and the implications these trends and attitudes will have on merchants, mills, and retailers throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click here to download a copy of the study prospectus. If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

Weekly Commodity Recap: Cotton

2009-07-06T10:13:00.002-04:00

After gapping higher the previous week, the cotton market rose further during the holiday-shortened week, closing at its highest weekly close in two months. Little major fundamental bullish news accounted for the gain, aside from Texas weather concerns, increased speculation about new forthcoming Chinese import quotas, and a strong weekly export report.

The week began quietly, with many traders either on vacation or on the sidelines in anticipation of the pending USDA Prospective Plantings report. Reports from India indicated the late monsoon had finally begun in earnest. Monday saw rainfall amounts surpass the normal daily mean rainfall for the first time in a month. While the cumulative progress of this season’s monsoon remains well behind trend, the intensification in precipitation was a welcome sign across the country. Nearby cotton prices in the U.S. closed up a modest 11 points on the day.

Tuesday, the cotton plantings report from the USDA was within trade estimates, with total cotton acreage estimated at 9.05 million acres, down 4% from last year. While this level is mildly higher than forecasted in the prospective plantings report issued in March, the number surprised few. Nearby futures traded in a 300-point range on the day after the release, but settled up only 63 points from the day before.

Wednesday saw a dramatic limit-up move, but appeared based on little fundamental news. The strong move up came on increased volume, and all major moving averages were violated, as was resistance at 59.71. Aside from developing crop progress and condition concerns in Texas, there seemed little to drive the market higher. At the start of last week, less than one-third of total cotton acres across the cotton belt were at or beyond the squaring stage, the slowest pace of progress for this week in more than a quarter century of record keeping. In particular, the Texas crop is hindering the advancement of squaring across the Belt. While the development of the crop remains behind trend, the condition of this year’s cotton crop is eroding over recent weeks and is lagging this point last year. As of last week, only 42% of the crop was estimated to be in good or excellent condition, versus 44% a week ago and 45% at this point last year. Again, Texas is to blame, dragging down the national average. Just 28% in this state is listed in good or excellent shape, the fourth-worst share for this week in over twenty-five years. Without acceleration in the progress of the Texas crop or improvement in the condition of the crop, it may be difficult for the outlook for this season’s crop to improve markedly in coming weeks. With little other major fundamental news to drive the market, nearby prices closed up 300 points at 58.63 cents per pound, the highest close in a month.

Thursday, net U.S. export sales came in at the top of the range of reported expectations and shipments easily surpassed the weekly average needed to achieve USDA's 2008-09 forecast, echoing our outlook over the last few months that the export forecast remains too low. While China remained the largest destination for shipments last week, volume to Mexico jumped to 46,494 bales, the highest in more than a year. Cotton prices closed the day and week at 59 cents, up 37 points from Wednesday and up 411 points from the week before.

After closing higher every day last week, cotton reached its highest weekly close in six weeks, but still does not appear technically overbought. Despite the recent volatility, we continue to see a market confined to a broad range between 55 and 63 cents. Summertime trading is always accompanied by weather scares and this July should be no exception. Whether late monsoons in India, dryness on the North China Plain, spotty rains in West Texas or early hurricanes in the southeast U.S., there is always weather to keep us company—and on edge—during July and August. The fundamentals of supply and demand appear tighter going forward, just not yet.

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

2009-06-30T23:34:00.003-04:00

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

2009-06-22T11:42:00.002-04:00

High quality and branded cotton acreage is on the decline around the world. In China, there is a major shift from extra long staple (ELS) to long staple (LS) cotton acreage underway in Xinjiang, the country's top cotton-producing province. In the U.S., Pima acreage is rapidly disappearing while Egypt is expecting a 50% reduction from last year's output. Ultimately, the rise of long staple cotton is supplanting high quality and branded grades, the ramifications of which will have a major impact on how merchants, mills, and retailers trade, purchase, consume, market, and brand high-quality cotton as a fiber and end-product.

FCStone Fibers and Textiles (formerly Globecot, Inc.) proposes to undertake a strategic study of the key countries producing long staple (LS) and extra long staple (ELS) cotton with a primary focus on China, India, the U.S. and Egypt. If you would like more information about this study, download the project prospectus. If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

Weekly Commodity Market Recap: Cotton

2009-06-22T11:39:00.002-04:00

After drifting lower over the last five weeks, the nearby price for U.S. cotton futures plunged in the latest week, led by a limit-down move last Monday, finishing at the lowest weekly close in over two months. Prices tumbled 454 points on the week to 51.56 cents per pound, weighed down by an eroding fundamental and technical picture.
Several fundamental factors contributed to sink prices in the latest week. West Texas saw an improvement in soil moisture levels from a rain front from Mexico, with the possibility for more in the next week. The dollar rose modestly after favorable comments about its continued status as the world’s reserve currency, dampening enthusiasm for a host of commodities, including cotton. And unfixed call sales in the U.S. retreated to 41,519 contracts, the lowest in a month, helping to drag futures lower. Plus, China’s auction of reserve stocks remains lackluster, suggesting little need to open new import quotas in coming weeks, despite persistent rumors to the contrary. Finally, disappointing reports on retail apparel demand from several markets around the world last week suggested a rebound in global offtake for cotton may be delayed longer than had been expected. These nuggets of news buoyed prospects of higher supply and waning demand, dragging prices lower.
Technically, several short- and medium-term indicators point to a continued bearish picture for cotton, while longer-term indicators hint at a more robust outlook. Certainly, the week has been unusually volatile. Monday’s limit-down move came before two down days and an almost 300-point outside range reversal Thursday, before the market turned defensive again Friday. The drop in futures this week made U.S. cotton the most competitive growth in the world. Also, the weekly spec/hedge report showed speculators continue to reduce their net long position, as it is now 5.3% net long versus 9.5% last week. Not only are speculators reducing their net long position, they are shedding overall open interest, as well. Open interest fell to 112,947 contracts late in the week, the lowest in three and a half years. Whatever the reason, they are losing their appetite for long cotton.
The market likely will remain in limbo before first notice day Wednesday and subject to pre-report positioning until after the June 30 Acreage report from the USDA. There has been talk of acreage being up from the Prospective Plantings estimates in late March, which may be factoring into market weakness. But the delayed crop, combined with east Texas dryness and soggy conditions across much of the northern reaches of the Mid-South are likely to have a detrimental impact on final U.S. production.

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

2009-06-17T00:10:00.004-04:00

Weekly Commodity Market Recap: Cotton

2009-06-15T11:24:00.002-04:00

Cotton futures saw little change on the week, as the market shrugged off the latest adjustments to forecasts from the USDA. As we have long argued, the USDA raised its export forecast for this year in response to another week of robust shipments, while lowering its old-crop production target a combined 800,000 bales in Brazil and India. The USDA also increased its 2008/09 estimate for Pakistani mill demand by 500,000 bales to 12.0 million. But bearish revised projections for the forthcoming marketing year offset the old-crop bulls. Particularly, anticipated Chinese mill demand and imports both fell 500,000 bales from last month’s forecasts, weighing on U.S. export prospects for next year.

For the week, Nearby cotton prices inched 99 points higher to 56.1 cents per pound, well within the 480-point band established over the last month. Reflecting the back-and-forth nature of prices recently, this latest week saw the first back-to-back daily declines in prices in a month. With little fundamental news establishing a clear bullish or bearish signal in recent days, cotton continues to take cues from outside markets. But as the declines in the dollar have begun to moderate, so too has price action in cotton, leading to this week’s dull trade.

This week promises to clear the fundamental picture a bit more, starting with the first crop condition report of the season. Analysts are watching the prospects for higher abandonment in Texas owing to drought, particularly along the Coastal Bend. Further downstream, retail sales data in several markets across Europe and Latin America may give a clearer look at when global consumer demand for apparel may begin to rebound, setting the stage for improved mill offtake. Also, last week U.S. cotton became quite competitive relative to several foreign growths. This is likely to spur increased sales in the next export report due Thursday. News developments on the dollar, the weather, and on the outlook for retail demand are likely to be key drivers for cotton prices in the near term.

Weekly Commodity Market Recap: Cotton

2009-06-08T10:23:00.001-04:00

The market is set to digest a slew of data this week that could help set the direction and pace for what has become a listless cotton market. Industrial production and retail trade reports from several key markets around the world may shed insight into the likelihood of improved demand for textiles and apparel around the globe.
In one of the most anticipated releases this week, new WASDE data Wednesday may set the tone for a gradual improvement in fundamentals, or could keep the cotton market mired in burdensome oversupply. We look for the report to boost the old-crop U.S. export forecast by a few hundred thousand bales, reducing carryover stocks and tightening the domestic stocks-to-use ratio. Looking to the new marketing year, we don’t expect much change in U.S. production, as an abundance of moisture in the Southeast and Mid-South may offset dry conditions in South Texas and California’s San Joaquin Valley.
On the demand side, we believe at 3.5 million bales, the U.S. mill demand forecast is optimistic. Consumption has recently averaged closer to 3.1 million bales, and we see little reason to expect a 10-15% improvement in 2009/10. We look for a rebound in the global economy in 2009/10 to drive a jump in global cotton mill demand and a global trade. Accordingly, as the world's largest exporter, we expect an increase in global cotton trade to prompt an increase in U.S. cotton exports in response. This increase from the USDA is likely to come gradually over the next several months, but we look for the higher revisions to start soon. Little anticipated change in supply from the May WASDE report, coupled with a net increase in demand is likely to reduce U.S. ending stocks to the lowest level in six years.
Cotton prices eased again last week, down three of the last four weeks, after breaking from their March-to-May surge. Nearby prices dipped 186 points, finishing the week at 57.11 cents per pound. Futures prices declined on the week as strength in the dollar continued to have a strong influence on cotton. Just as cotton is mostly higher since March, the dollar is mostly lower over the period. But last week saw a sizable rebound in the dollar, boosted by positive data in Friday’s unemployment report. With few unanticipated changes in the fundamentals yet to materialize from the forthcoming cotton marketing year, we look for cotton to take more direction from the influences of outside markets. We remain mildly bullish longer term, but expect choppy conditions to persist into the summer.

Outlook: The Future of the Global Cotton & Polyester Markets

2009-06-02T00:59:00.002-04:00

The past 18 months have challenged the global cotton trade as never before. After surviving a virtual collapse in aggregate textile demand not seen since the Great Depression, global over-capacity has become a serious problem for the long-term viability of the fiber and textile trade. Further, dramatic changes in the international textile industry have resulted in new consumption trends. This has led to serious problems for merchants, co-ops, producers and consumers of cotton. At the same time, cotton has lost market share to polyester on a global basis. As if these problems were not bad enough, provisions of the Farm Bill are having unforeseen effects on the market – effects that will have long-term implications.

As a result, we are undertaking an extensive multi-client study of the global supply and demand situation for polyester fiber and cotton. The study will be completed in June.
Recognizing that basic market statistics are widely available, FCStone Fibers & Textiles, is building upon these data to establish a realistic forecast for future textile fiber consumption and production. Because of our unique perspective of the cotton and textile businesses, we are leveraging our unique insight into the market with supporting quantitative and qualitative information. The ensuing study will be designed to provide a competitive advantage to sponsor companies.

Click here to download a copy of our project prospectus.
Questions? Click here to contact us now to discuss, or call us at 615-234-2757

Weekly Commodity Market Recap: Cotton

2009-06-01T12:58:00.002-04:00

Even though the trading week was shortened by holidays in the U.S. and China, cotton saw a jump in volatility, with prices swooning almost limit-down during intra-day trade Tuesday, only to bounce limit-up during early trading Friday. On balance, the two days mostly offset one another, with prices easing 14 points from last week to 56.97 cents per pound. Sunny, drier weather across much of the U.S. cotton belt enabled producers to rapidly advance plantings last week, but the season-to-date national pace still remains well behind trend, hinting at the increased potential for yield and quality issues later this autumn. At 61%, the share of crop already planted to cotton jumped 19 percentage points from last week, but is still down 8 points from the five-year average. Arguing further for the bulls, U.S. exports in the latest week remained above the pace necessary to reach the latest USDA forecast, reinforcing our belief that this forecast is too low. At 296,000 bales, shipments again easily outpaced the 207,000-bale pace necessary to reach the 12.5 million-bale target from the government. We look for exports in 2008/09 to exceed 13.0 million, putting tighter pressure in coming weeks on the domestic stocks-to-use ratio. Further cementing the bulls’ argument, the U.S. Dollar Index breached its December 2008 low, breaking technical support levels and driving a host of commodity prices higher.
The bears point to the acceleration in the auctions of reserve stocks in China, weak U.S. mill demand, and scattered showers across much of Texas to temper price gains. China said last month it will sell just over 1.5 million tons of cotton from its state reserves in a bid to ease tight supplies. Since May 22, Chinese textile mills in China have bought 65% of the 58,442 tons released for sale so far. While a far cry from the total reserve levels, volume jumped in the latest day of trading after the government eased the procurement price as discussed here. Also last week, the U.S. Census Bureau announced that annualized April mill use fell to less than 3.1 million bales, the lowest April ever recorded. This is less than the 3.6 million currently anticipated by the USDA for 2008/09, and may drive the projection lower in coming months. Finally, wet weather returned to much of Texas in recent days, benefiting the young crop. While Rio Grande cotton remains under exceptional drought conditions, the welcome rains alleviated dryness across much of the Rolling Plains and West Texas, hinting at improved yield prospects in the largest cotton-producing state.

Weekly Commodity Market Recap: Cotton

2009-05-26T11:14:00.001-04:00

Following the correction in prices witnessed two weeks ago, last week the market entered a consolidation pattern as big, offsetting bullish and bearish factors grappled for dominance. Following weeks of speculation, China began to release its ample supplies of reserve stocks to the market. This 1.5 million-ton move is likely to limit any new import quotas in coming months, while the local market digests this extra cotton. While the announced price is only modestly less than futures prices on the Zhengzhou Cotton Exchange, the psychological impact on the market is likely to outweigh the fundamental impact. Also, a record -15.2% annualized plunge in Japanese GDP here dimmed prospects for a quick rebound in clothing demand in the world’s second-largest retail apparel market, casting a bearish pall over the cotton market.
But the bulls were also active last week, led by dollar weakness and robust U.S. cotton shipments. Persistent weakness in the greenback continues to support many commodities, and is providing a solid floor to cotton. The U.S. Dollar Index continued its fall toward the lows set in mid-December. This weakness in the dollar comes as cotton exports soared to a marketing year-to-date high. At 465,000 bales, last week’s volume almost doubled from the week before. It also supports our argument here that the latest USDA forecast may be too low. With less than twelve weeks remaining in the marketing year, exports only need to average 214,000 bales per week to reach the government forecast of 12.5 million bales. FCStone models suggest exports may finish closer to 12.9 million bales, tightening the domestic stocks-to-use ratio this year and supporting an argument for higher prices.
Nearby cotton prices ended the week modestly higher, finishing with a gain of 81 points from the week before, reaching 57.11 cents per pound. While we continue to affirm the longer-term bullish uptrend in cotton prices, last week’s consolidation pattern could point to a nearer-term breather for the market in coming days, particularly if the dollar sees a brief rebound in its gradual slide lower.

Weekly Commodity Market Recap: Cotton

2009-05-11T11:44:00.004-04:00

Cotton prices continue to climb on further tentative signs of improving global demand and continued movement away from the dollar, outpacing gains in other softs and ignoring technical signs of being extremely overbought. U.S. Nearby prices finished the week just shy of 60 cents per pound, the highest close in almost eight months. This marks the eighth weekly gain in the last nine weeks, showing a pronounced 20-cent rebound from the November/March double-bottom. After lagging corn and soybean prices during much of 2009, cotton prices have climbed faster than either crop the last few months, and are already up 22% since the start of the year. While the late arrival of this rebound may have a limited impact on plantings across much of the U.S. cotton belt, technical indicators are screaming for a correction. The daily Relative Strength Index stands at 83.0, a few standard deviations away from its long-term mean of 50 and the highest point since cotton futures’ dramatic spike in March 2008. The higher and faster cotton prices escalate, the more in need of a correction the market becomes.

But the gradual erosion in the dollar is having a big impact on wide-ranging strengthening across much of the commodity complex, including cotton. The exit from the greenback began some time ago but has recently escalated in Asia, where new confidence in the regional economies and faith in local currencies are taking hold. As the dollar continues to weaken, the case to move funds back into commodities is again looking strong. Longer-term, we remain quite bearish toward the dollar; if this erosion persists, it is likely to be a major stimulus for the overall commodity complex buoying cotton.

The new week promises much new data on the outlook for cotton in 2009/10. Monday afternoon’s crop progress report is likely to show cotton plantings in the U.S. remain even further behind normal, as a deluge of rains to muddy Delta and Southeast fields delay plantings. The USDA will release its first country-by-country breakdown Tuesday morning, one month earlier than normal. We expect dramatic declines in production in China and the U.S., with gains in India and Australia partially offsetting the losses elsewhere. On the demand side, we project global mill use will rebound somewhat in 2009/10 from this year’s record collapse, as growth prospects improve in many markets around the world. A look at old-crop cotton estimates suggests U.S. demand may rise from the April projections, as higher-revised exports overshadow another likely decline in domestic mill demand. Globally, we expect mill use forecasts for 2008/09 will drop for the eleventh straight month, primarily owing to even lower estimates in China. Later in the week, April estimates of Chinese yarn and fabric output are likely to provide more evidence of a rebound in demand in this market, stoking hopes for improving offtake globally later in 2009.

Weekly Commodity Market Recap: Cotton

2009-05-04T11:50:00.003-04:00

Rising in concert with the broad strengthening in commodity markets, cotton prices finished the week at the highest close in seven months, but the presumptive re-strengthening in global textile markets is proving to be tentative, suggesting the robust gains in cotton prices may be premature. Nearby prices in the U.S. settled at 57.20 cents per pound Friday, up seven of the last eight weeks and the highest close since early October. The bulls point to several factors supporting the two-month rally in price. Across the cotton belt, plantings are running behind trend in virtually every state, possibly limiting the number of heat-degree days the crop may receive. Continued dry conditions and inadequate snowpack in California promise to limit irrigation supplies and hinder crop development there, suggesting that state’s cotton crop could only reach a paltry half a million bales this year, the lowest since World War II. The 2009 Central Asian crop has gotten off to one of its worst starts in ten years, with an unusual pattern of wet and rainy conditions plaguing many of the growing areas of Uzbekistan and Turkmenistan, which account for the bulk of the acreage in the area. Also, speculators’ net long position increased again last week, reinforcing the bullish sentiment. Finally, the first signs of an improving economic outlook around the world are beginning to show, implying improved textile offtake in the forthcoming marketing year.

The bears counter with several factors that suggest the market is due for a correction. First, the technical picture remains overbought. Friday’s Relative Strength Index (RSI) for the Nearby reached 78.69, the highest level since March 2008, when prices began an eight-month slide. Since bottoming out in November, cotton prices are up over 40%, easily outpacing the rebound in corn and soybean prices. Fundamentally, cumulative new investment in China’s textile and apparel sector in the first quarter remains less than over the same period last year, suggesting 2009 may see lower output from the world’s largest cotton consumer. Wetter conditions returned to West Texas and most of the northern Cotton Belt in the last week, providing a welcome boost to sub-soil moisture levels before plantings commence in these areas. And longer term, Australian forecasts suggest plantings there could rebound to the highest in years, as reservoir levels continue to improve. We remain modestly bullish longer term, but increasingly look for an overdue short-term correction in the market.

Weekly Commodity Market Recap: Cotton

2009-04-27T10:50:00.002-04:00

ICE cotton futures continue to march higher, rising for the sixth time in the last seven weeks, but more cracks are appearing in this recent bull run. The Nearby contract finished the week at 52.70 cents per pound, surpassing January’s near-term high and reaching the highest close in six months, buoyed by factors internal and external to the cotton market. A weaker U.S. dollar and still-massive Chinese and Indian stocks that remain withheld from the market provide a firm foundation to price. Also, the CFTC recently reported that unfixed call sales of cotton rose for the sixth straight week—tracking the rebound in futures—and reached their highest level in two and a half months.

But cracks in the façade are beginning to show, suggesting a correction may be warranted. Even as the first green shoots of improving demand are beginning to appear in pockets around the globe, one must remember world cotton mill demand and trade remain in the worst contraction on record. China is showing more signs of improved offtake, but Indian cotton textile output collapsed in February. Pakistani and Turkish mills remain in dire straits, while one of the largest yarn mills in the U.S. closed for good earlier this month. Technically, nearby cotton prices pierced 70 on the RSI for the first time in ten months, adding another overbought signal. While other ag futures—particularly on corn and soybean—are up in concert from their near-term lows set in early March, cotton has climbed faster, supporting the notion of a pullback. We continue to expect the global textile economy to improve in the new marketing year, supporting an outlook for modestly higher prices, but look for a nearer-term correction in the market before journeying higher.

Weekly Commodity Market Recap: Cotton

2009-04-20T11:43:00.001-04:00

Since reaching its year-to-date low in early March, cotton continues on its tear, with prices rising for the fifth time in the last six weeks. At 49.94 cents per pound, Friday’s close on ICE Futures U.S. is the highest in over two months and reflects a 24% rebound from its March low. An improving fundamental outlook is helping to support prices. While global fiber and textile markets still remain weak, signs of life are beginning to emerge, suggesting brighter days ahead. Chinese mills boosted yarn production in March at a double-digit pace to the second-highest level ever recorded. Similarly, output of manmade fiber in this latest month inched to a new high, driven by renewed demand. In the U.S., CCC cotton loan stocks extended their rapid contraction for a fifth straight week, while Chinese reserve procurement stocks still remain withheld from the market as prices have risen. At the same time, plantings in a handful of countries may fail to reach early projections, implying likely lower stocks in the forthcoming marketing year and evidence for higher prices globally.

While we remain bullish for price in the long term, we are hesitant in the near term, owing to prospects for a shorter-term pullback. The USDA still maintains what many market observers—including us—have maintained for some time is an unrealistic forecast for Chinese mill demand this marketing year. Additionally, new U.S. cotton usage data for February suggest the domestic forecast remains overstated. And several technical indicators for the short-, medium-, and long-term increasingly are showing ‘buy’ signals. While we pay close heed to the technicals, the contrarian argument suggests if everyone is long, the time for a correction may be rapidly approaching before the market continues higher.

Weekly Commodity Market Recap: Cotton

2009-04-06T11:01:00.004-04:00

The latest week provided the first hints of evidence of a market that is seeing the first flickers of improved demand that could point to sustained strengthening in prices well into 2009/10. Last week brought the first peek at the USDA’s prospective plantings report for the 2009/10 crop. The report pegged U.S. cotton acreage sliding 7% from a year ago to 8.8 million acres, the lowest in more than a quarter century. But the forecast actually fell in the middle to higher-end of the range anticipated by industry analysts, and was largely viewed as neutral to the market. Assuming average abandonment and yield in this coming season, the crop size may be little different from the 13.0 million bales just harvested this past fall.
The market also awaits the latest USDA numbers due to be released this week. While April’s figures typically have less of an impact on the market than preceding months, they cannot be disregarded. We look for the supply side to remain little changed from March, while domestic demand is likely to see a mild increase, owing to a higher export forecast. On balance, U.S. ending stocks may shrink 150,000 bales owing to higher demand. Globally, the USDA’s production forecasts have dropped seven of the last nine months, shedding almost eight million bales from its initial projections in June. We expect another decline—albeit a smaller one—owing to adjustments from Asian and Southern Hemisphere producers. We also expect to see continued contraction on the demand side, perhaps slipping a quarter million bales to 110.8 million. Mill demand forecasts have declined each of the last nine months, collapsing a jaw-dropping 16 million bales. While we are beginning to see signs of bottoming out in usage patterns in different countries, we expect to see further contraction in several markets in coming months. On balance, lower global supply and demand forecasts could offset one another, meaning little net change in ending stocks from the March forecast of 62.5 million bales.
Despite a rather neutral estimate of U.S. plantings, New York futures subsequently showed considerable strength on the week, influenced both by gains in other commodities and by tentative signs of a bottoming in demand prospects. One development currently playing a role in the behavior of global prices is the rally in domestic cotton prices that is occurring in three of the largest producing and consuming markets—China, India and Pakistan. Chinese domestic prices soared to a five-month high in the latest week. The driver in prices is a shortage of high grades throughout East China. In Pakistan and India, local prices are also firming as the available supply of high grades tightens and yarn inquiries—especially from China—perk up. Futures prices are up for the third week in the last month, with U.S. Nearby prices closing last week at 47.6 cents, the highest level in almost two months. While we remain longer-term bullish, the rapid ascent in price coupled with several technical indicators point to overbought conditions and suggest the need for a consolidation before the market climbs higher.

For more analysis on the global fiber and textile supply chain, please visit our website at www.globecotnews.com.

Weekly Commodity Market Recap: Cotton

2009-03-30T09:32:00.000-04:00

While the longer-term trend may point to firmer prices for cotton, outside influences weighed on the market in the latest week. In particular, a rising dollar, weaker commodity prices, and sharply lower grains sapped enthusiasm for continued near-term strengthening in cotton. The dollar saw one of its biggest weekly gains in almost six months, as concern over unimpressive EU plans to stimulate demand in Europe and a second straight monthly gain in consumer spending in the U.S. drove demand for the greenback higher. The global commodity complex weakened in response, as prices on a wide swath of commodities eased lower. After climbing three of the last four weeks, the CRB Index retreated four of five days last week, led by Friday’s 542-point sell-off, the steepest in a month.

Attention in the U.S. is currently focused on Tuesday's March 31 planting intention report. There appear to be differences of opinion as to the anticipated reduction in cotton acreage. In some trade groups, U.S. acreage is forecast to fall to as low as 8.2 million acres (the U.S. planted 9.47 million acres last year) -- a few predictions are even lower. Several grain groups have the decline only down to 9.0 million, while we anticipate a number closer to 8.4 million acres. At the center of the debate is the profitability of corn and soybeans. Breakeven costs for many growers in soybeans are near $8.00 per bushel: while at various times, farmers have been able to lock in $1-2 per bushel profit margins. Planting of the 2009 cotton crop has begun in Arizona and South Texas. Beneficial drenching rains fell for several days this past week across virtually the entire Delta and Southeast, with showers possible in parts of West Texas over the next few days.

One factor that has been limiting the ability of May ICE futures to break through the 45-46 area this past week has been the volume of hedging from the U.S. trade as they redeemed CCC loan cotton and hedged it. This was confirmed in today's weekly CCC loan redemption data showing a total of 1,852,680 running bales were redeemed from the CCC loan last week, leaving loan stocks at 4.875 million running bales of upland cotton, the lowest level in months.

Technicals deteriorated further as the first test of the longer-term moving averages clearly failed and May closed below Thursday's outside range low. This has left the cotton market in a near-term vulnerable position. Overall, the market is now back on the defensive in the short term.

Weekly Commodity Market Recap: Cotton

2009-03-24T00:04:00.001-04:00

As sentiment for lower cotton plantings in coming weeks in most key growing areas around the world begins to take root, prices are firming in response. China, the U.S., Uzbekistan, and the African Franc Zone all expect to see less land planted to cotton and presumably fewer bales harvested this fall. Another survey of producers across several provinces in China points to a double-digit decline in plantings. While land planted to cotton may not be off as much as feared just a few weeks ago, a substantial drop in China appears highly likely. In the U.S., conditions across much of Texas and California remain drier than normal, and more rain is needed before planting time, else plantings and yields may be adversely impacted. The initial prospective plantings report from the USDA is due in little over a week, but is expected to show another sizable decline in U.S. acreage, possibly falling to the lowest level in over a quarter century.
More broadly, the rebound in commodity markets and the weakening in the dollar are also supporting cotton prices. The CRB Index last week reached 226.1, its highest point since January. Last week commodities surged the most this year, led by energy and precious metals, on speculation that the Fed’s steps to resuscitate the U.S. economy will spur demand for raw materials as a hedge against inflation. The Fed’s announcement to buy $1 trillion in long-term Treasuries also drove down yields and sank the dollar, helping to support export sales of cotton.
Beyond the boost from these outside influences, ICE cotton futures were able to show independent price strength as new speculative longs were established following an upside breakout after holding a well-defined double bottom first begun in November. Total open interest rose to 133,390 contracts toward the end of last week, the highest level in 4 months. Cotton’s attraction is linked to the heavy discount of the forwards and a rather impressive chart pattern. Prices finished the week just above 44 cents per pound, the highest point in six weeks. Expect faint flickers of an improvement in demand in several markets to be tested in coming weeks from the extinguishing influence of higher prices.

Lest I forget...

2009-03-16T17:05:00.000-04:00

Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Past performance is no guarantee of future results. Opinions are subject to change at any time, and are not a solicitation or recommendation to buy or sell commodity futures or commodity options. Past performance is not indicative of future results. The information contained in these messages has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness.

Weekly Commodity Market Recap: Cotton

2009-03-16T11:37:00.000-04:00

The week provided plenty of news to drive the market, but with offsetting bullish and bearish fundamentals, prices remain constrained within a 400-point trading range established over the last month. China’s AQSIQ held firm on its March 15 deadline to implement a registration scheme for foreign cotton suppliers. This plan has been challenged by cotton exporters around the world, particularly in Australia, Brazil, and the U.S., the largest suppliers to China. Accordingly, while 104 firms around the globe have been approved for this list, key exporters in these countries remain conspicuously absent.
Weekly reports from the CFTC added a dose of bearishness to the market. The cotton on call report showed the volume of unfixed call sales—futures needing to be bought—fell to its lowest level in almost seven years. Similarly, the Commitments of Traders report showed index funds’ net long positions retreating to fewer than 60,000 for the first time in over three years.
The potential for a plateauing dollar could turn into a positive impact for cotton and other commodities. After reaching a near-term high earlier this month, the topping pattern now prevailing in the U.S. Dollar Index is supporting a broad mix of commodities. Already, the last two weeks of U.S. exports have been among the strongest in months, prompting the USDA to raise its export forecast 500,000 bales from February to 12.0 million.
The middle of the week saw the release of the latest WASDE supply/demand report from the USDA. The report was mixed, with current-year fundamentals expected to tighten in the U.S., but loosen in China, India, and around the world. A 500,000-bale increase in U.S. exports offset a 150,000-bale decline in domestic mill demand. Worldwide, global mill demand forecasts for this year fell for the ninth straight month, down another 1.5 million bales from February’s projections.
Looking to next year, USDA officials presenting at the Ag Outlook Conference provided a first glimpse into new-crop fundamentals. Lower anticipated plantings in the U.S., China, and the world suggest supplies will remain lower than this season, as producers around the globe shift land to other crops seeking higher returns. With the global economy expected to improve in 2010, world mill demand is likely to rise modestly in step, driven by a mild rebound in Chinese use. These forecasts confirm an outlook for tighter markets in 2009/10 in the U.S., China, and worldwide, supporting sentiment for a return to stronger prices longer term. But first, the market must digest the continued erosion of weaker mill use and trade projections this year that is hindering price in the short term.

For more analysis & commentary like this, please visit our website at www.GlobecotNews.com.

Dirt to Shirt: Linking the Global Fiber & Textile Supply Chain

2009-03-11T23:59:00.000-04:00

Perhaps no issue is more integral--or more contentious--to world trade and the welfare of millions of people around the globe than the international fiber and textile supply chain. Whether from feedstock to fabric or from dirt to shirt, over time fortunes have been made and lost, wars fought and settled, and entire economies thrust from an agrarian focus into the modern, industrialized world.

From the fiber--natural or synthetic--through the supply chain to the final retail consumer, we track, interpret, and forecast the evolution and machinations that drive this complex system, so you don't have to. 30 minutes on our site can save you hours of trolling the web. And provide insight behind the data. Across the supply chain, we encounter questions like the following:

"Is it going to rain in Uzbekistan this weekend and how might this affect development of the cotton crop?"
"How will OPEC actions drive crude oil and feedstock prices?"
"When does a change in the euro impact fiber prices or textile trade patterns?"
"How much do changes in GDP affect consumer spending on apparel?"
"What will the new administration mean for textile trade policy?"

.... We address all these issues and more, every day. Globally.
Curious? Whether you are looking for a quick tidbit of insight into the markets, or need big help with one of our consultants, come give us a look at www.globecotnews.com and see for yourself how we can help provide you with business intelligence for an interwoven world.