Weekly Commodity Market Recap: Cotton

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.