Weekly Commodity Market Recap: Cotton

Weekly nearby cotton prices on the ICE Futures U.S. closed Friday at their highest levels in ten months, shrugging off the effects from a mildly bearish—but expected—USDA supply/demand report, focusing instead on mounting concerns over delays in the Indian monsoon, sweltering 100+ degree weather across much of Texas, and persistent rumors of new forthcoming import quotas in China. This marked the third straight week of higher closes in futures prices, with the week finishing at 60.39 cents per pound. After closing lower the first three days of the week, Nearby prices roared ahead Thursday and Friday, up a combined 339 points. Most-traded December pierced a six-week high of 62 cents Friday and is poised to challenge resistance below 63 cents this week, the highest point in ten months.

Optimism earlier this season for record yield and production in India is fading with each passing day, as concern grows over a lackluster monsoon season. After its earlier-than-normal arrival, progress of the monsoon across the country has been slower than trend, with most parts of central, north, and northwestern India yet to receive sizable rains. Over the last two months, daily rainfall has only surpassed the average daily rainfall totals nine days, with totals not reaching half of the normal amounts most days. The window of opportunity for planting the Indian cotton crop will close this week, squelching early optimism for hearty yields and adding to the bulls’ fundamental argument for tighter global stocks.

In the western hemisphere, weather issues also are adding to concern about the size of the crop. Cotton areas across most of southeast Texas continue to experience exceptional drought, and no measurable rain is forecast for the coming week. For the ensuing five days (July 14 – 18, 2009), below-normal precipitation is again expected across Texas, hinting at prospects for dismal yields in the area. Without replenishing rains soon, it is doubtful that there will be sufficient water to finish the cotton crop in the Coastal Bend region this season, reinforcing the bullish sentiment.

Finally, demand-side issues are reinforcing the bulls’ position. Persistent rumors continue to circulate of an imminent release of additional import quotas in China. These rumors have loomed over the market for several weeks, seeming to gain additional traction over time. Now, some Chinese mills are confirming that they received additional import quotas. With the new quota estimated to be about 400,000 metric tons (1.8 million 480-lb. bales), this could provide a boost to early-season U.S. exports in coming weeks.

This outlook for a weaker Indian monsoon, higher temperatures in southeast Texas, and new Chinese import quotas enabled the market to rise again in the latest week, effectively ignoring bearish sentiment from the USDA’s latest WASDE report.