Weekly Commodity Market Recap: Cotton

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.