Weekly Commodity Market Recap: Cotton

After strengthening for four straight weeks, cotton prices retreated last week, as bearish fundamentals in the U.S. and abroad chased off the bulls that had dominated the market over the last month. Domestically, crop conditions generally tended to improve last week, as key cotton areas of the Southern U.S. largely experienced timely rains last week. Globally, India’s delayed monsoon finally kicked into gear, just as the monsoon season reached its typical seasonal peak. The past several days marked the first week this year in which monsoon rains exceeded the norm, brightening the prospects for late-planted cotton in the country that plants more land to cotton than any other. Similarly in China, timely rainfall and normal hot weather in Anhui and Hebei is benefitting cotton in both provinces, hinting at improved yield prospects in the world’s largest cotton-producing country.

The demand side also saw the bears dominating the news in the last week. U.S. mill demand for cotton continued its long-term slide, with annualized consumption in June falling 26.3% from a year ago to 3.22 million bales, down for the 46th time in the last four years. June cotton fabric exports from both China and Pakistan also shrank, extending declines in both markets and countering tentative ‘green shoots’ of improving demand in yarn output in both markets. Further downstream, the week brought reports of a record collapse in Peruvian apparel exports and the biggest drop in years in clothing shipments from Sri Lanka. In turn, these markets responded to sinking import demand reported in key retail markets last week, including the U.S. and Canada.

For the week, Nearby cotton traded lower three of five days, shedding 471 points on the week. Technical action suggests that the market may have established a near-term top, with cotton completing a weekly outside-range reversal to the downside late in the week. Unfixed on-call sales in December cotton expanded 1,018 lots to 16,859 during the week ended last Friday based on revised data from the prior week, while unfixed call purchases increased 338 lots to 8,876, according to the latest Commodity Futures Trading Commission data. The ratio of potential buying to potential selling edged fractionally higher to about 1.9:1 and the net call difference of 7,983 lots comprised a marginally higher 7.6 percent of December's rising open interest.

Looking ahead to the coming week, the calendar is relatively light on reports likely to directly impact the cotton market. As we approach the end of the marketing year, exports remain underestimated, something we have long argued. But improved weather developments this week could easily counter any bullish sentiment from modestly higher revisions to exports. The dollar is likely to have the biggest impact on the market in coming days, as the government will flood the Treasury market with a record amount of new debt this week, topping $200 billion. Already, the dollar is near its lowest level this year on speculation the global economy is shaking off the worst recession in decades. A weaker dollar could drive commodities—including cotton—higher, reversing last week’s swoon, or a rebound in the greenback could extend the dip in cotton prices, fortifying the near-term resistance set at 63 cents per pound last week.