Weekly Commodity Market Recap: Cotton

Cotton prices edged higher for the fourth straight week, finishing Friday at 62.10 cents per pound, the highest weekly close since September. Signs from both the fundamental side and trading side of the market support the recent firming in price. While cotton textile production in India, Turkey, and the U.S. remains lackluster, signals in China continue to point to a rebound in downstream demand for cotton. Total yarn production rose to a record 2.2 million metric tons in June, the 22nd year-over-year gain in the last two years. Further downstream, cotton fabric production rose to 2.9 billion square meters in June, also a record. On the supply side, India’s delayed monsoon rains advanced in the latest week, but may be too late to justify such a high level of plantings forecasted by the USDA. Some analysts—including FCStone—believe Indian production this year will fall well short of the 25 million-bale forecast from the USDA. In the U.S., exceptional drought conditions intensified across southeastern Texas in the latest week, withering crop prospects in the Coastal Bend region, something we have long cautioned about.

Spec and fund buying are also suspected as a big influence behind the recent advance in futures prices. Since reaching a new-term low of 105,969 contracts in open interest in late June, open interest in cotton futures climbed more than 20,000 contracts since then, up 18.9%. While open interest of 126,038 contracts pales in comparison to the 302,000+ contracts of open interest in early March 2008, an increase of nearly 20% in open interest in just sixteen sessions indicates that spec and fund money is slowly but surely returning to the cotton market. The recent run-up in U.S. futures prices mirrors the gains witnessed in China. Nearby cotton on the Zhengzhou Commodity Exchange closed the week at the equivalent of more than 90 cents per pound, the highest level in months. The bulls’ argument also points to a falling dollar, coupled with stronger crude oil, gold, and grains prices.

Even so, all these bulls gathering on the bandwagon can tip the market into a correction. While the technicals are not screaming for a correction yet, the USDA threw cold water on the market recently by boosting anticipated global ending stocks by 1.4 million bales. And prospects for a rebound in global mill demand remain based on the outlook for an improvement in the global economy, something we believe will be sluggish in coming, with risks weighted to the downside.