Weekly Commodity Market Recap: Cotton

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.