Weekly Commodity Market Recap: Cotton

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.

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