Weekly Commodity Market Recap: Cotton

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.