Weekly Commodity Market Recap: Cotton

After rising each of the previous three weeks, cotton futures retreated last week on weaker outside influences, fund selling, better harvest weather, and bearish technical signals. After cresting at the highest level in more than a year, nearby prices dropped 124 points on the week to 61.94 cents per pound, pulled lower by Friday’s nearly limit-down close. The broader commodity complex saw general weakness over recent days, as the CRB Index eased lower for the week. This broad-based weakness weighed on cotton prices as the dollar posted a modest recovery last week. After falling to a 13-month low, the U.S. Dollar Index rebounded late in the week to a three-week high before settling at 77.02, up 35 points on the week. Also, confirming the relationship we showed here, weaker equities took a toll on the cotton market. After climbing to its highest level in almost a year, the Dow Jones Industrial Average slipped last week, dragging cotton prices lower. Weaker commodity prices, a stronger dollar, and lower stock prices together cast a pall over the cotton market, helping drag every contract month for the next two years lower for the week.

Fund selling also contributed to weigh on cotton prices last week. Mirroring the rise in cotton prices over the last year, index funds’ net position rose to 75,219 contracts a week ago, the highest in twelve months. This left the market vulnerable to a setback that we suggested here. Accordingly, last week’s fund selling drove this net position lower to 74,741, prompting the exit in the market late in the week.

Weather has turned much more favorable across the U.S. cotton belt in recent days, improving the yield outlook from earlier in September. While the Delta and areas of the Southeast received heavy rains over the previous two weeks here, conditions turned drier this weekend and are expected to remain mostly dry for the week. The forecast for the next few days here has the Delta and Southeast warming up and drying out, which should promote boll opening and early harvesting. In West Texas, warmer, sunny conditions will prevail this week. While the recent deluge in rains slowed the development and harvesting of the crop, the warmer, dry days this week will be welcome across the Belt.

Weaker technicals also pressured cotton prices lower on the week. By climbing to a new high only to falter to a low by the end of the week sets up a bearish outside range reversal to the downside and hints at additional selling early this week. A hook reversal late in the week added to the bearish sentiment. And after signaling overbought conditions by breaching the critical 70-level on the RSI late the week before, lower prices reduced this indicator to a more moderate range. The market has been due for a correction, and last week's activity seemed to show just that.

Weekly Commodity Market Recap: Cotton

Cotton futures continued their impressive move higher last week on new bullish fundamental and technical signals, with Nearby prices rising for the third straight week to the highest close in more than a year. The most-traded December contract extended its streak of daily gains to twelve straight days, the longest streak in the contract’s life. Last week’s strength in the cotton market came from both internal and external influences. Worries over crop prospects in the U.S., China, and the Indian subcontinent combined with a weaker dollar and firmer stock market helped buoy prices. Rainy weather in the Delta and Southeast here are raising yield and especially quality concerns for the U.S. crop. Similarly, too much rain in Anhui here and Shandong here are suspending cotton procurement and likely to negatively impact crop yield in these key Chinese provinces. Conversely, a premature end to an already lackluster monsoon in India here prompted the USDA recently to pare back its forecast for the Indian crop by one million bales, limiting output in the country that plants more land to cotton than any other. And extensive damage from insects and leaf curl virus in Pakistan here are likely to prompt increased need for foreign cottons in the world’s third-largest import market in coming months. These bullish fundamental signals helped push futures prices on every contract month higher last week, with the Nearby closing at 63.18 cents per pound, its highest finish since September 2008.

Outside influences also are helping support cotton prices. Since reaching a near-term high in March, the dollar remains on its slippery slide, falling against a basket of currencies. The U.S. Dollar Index closed down last week for the third straight time, falling to 76.67, its lowest close in more than thirteen months, driving commodity prices higher.

Mirroring similar relationships noted in other commodities, cotton is also enjoying a rebound in prices from the lift in equities. Since reaching a near-term low six months ago, the Dow Jones Industrial Average closed up again last week, reaching 9,838, the highest point in almost a year. This bottom, inflection point, and subsequent rise mirrors a similar trend in Nearby cotton prices. Several technical indicators—particularly the RSI—are showing overbought conditions. And with a global stocks-to-use ratio likely to be only modestly tighter from last year, we are not confident the market can justify prices much above these levels. Accordingly, we look for prices to ease in the near term as harvest reports begin to accumulate over the next month.

Weekly Commodity Market Recap: Cotton

Last week’s cotton market saw Nearby ICE prices climb for the second straight week as more signs of improving demand are emerging, but an unimpressive WASDE report from the USDA, better yield prospects in several countries, and seasonal pressures may temper price gains in the near term. Nearby prices on the ICE Futures U.S. exchange rose late in the week for the ninth time in the last eleven sessions, trading over 60 cents for the first time in almost a month. Similarly, most-traded December closed up for the tenth time in eleven days, finishing the week at 61.24 cents per pound, the highest close since August 13.

Hints at improving demand are taking root around the globe, buoying price. China’s Keqiao Textile Index—a gauge of textile and fiber prices—rose for the fifth time in six weeks last week here as traders are becoming more confident of an improving outlook. August yarn production in China—a proxy of cotton mill usage—rose 12.7% from a year ago to 2.1 million tons, extending its streak of gains. Further downstream, retail apparel sales rebounded in a number of markets, supporting the gains in textile output. France, Australia, Brazil, and Germany all reported improved consumer demand for clothing in the latest month. While we expect gains in retail demand to remain tepid in coming months, we look for the improved demand to spread to more countries as markets rebound from a tumultuous last year.

At the same time, supply-side signals may hinder the continuation of the recent streak of firmer prices. Trading activity last week saw the latest release of supply/demand forecasts from the USDA, a report generally viewed as neutral to the market. In the U.S., anticipated higher production and exports offset one another, resulting in no net change in expected ending stocks in 2009/10. But more recently, continued downpours across much of Texas are likely to boost yield potential around Lubbock in coming weeks. Globally, a million-bale decline in Indian production and no sizable change in demand tightened the anticipated world stock-to-use ratio as we expected here. Lastly, seasonal harvest pressures will likely start weighing on the market soon, particularly if crop conditions continue to improve. For these reasons, we not as confident that the streak of steadily higher daily closes will persist for another week as boll opening accelerates and harvest commences.

Weekly Commodity Market Recap: Cotton

After retreating for three straight weeks, cotton prices managed to post a modest rebound last week, buoyed by a weaker dollar and indications that consumers might be set to start shopping again as the holidays approach. But supply-side pressures on the crops in major producers may limit this bullish sentiment in coming days as the market awaits the newest crop report from the USDA later this week.
Cotton prices extended their gains late last week on the back of a weaker dollar. Since finishing last week near the low end of its recent trading range, Nearby cotton futures are up six of the last seven sessions, closing last week at 57.53 cents per pound. Despite losses last week in grains, a declining dollar continues to support cotton prices. The greenback slid for the seventh time in nine weeks, threatening to fall to its lowest level in a year. The Dollar Index on ICE Futures U.S. eased to 78.14 Friday as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven. Cotton prices’ negative correlation against fluctuations in the dollar has been particularly impressive over the last year and a half, hinting that if this relationship persists, there may be more upside potential for cotton in coming weeks.



Adding to this bullish support are indications that consumers might be preparing to start shopping again, just in time for the holiday shopping season. Although sales were down again in August at most U.S. apparel retailers here and the unemployment rate rose to a 26-year high here, they were not as bad as expected, putting some tentative hope in the market. However, we are not as optimistic, and look for same-store sales at most clothing retailers to continue to post losses—albeit at a slower rate—in coming months, with comps roughly flat by Christmas.
On the supply side, the market is still waiting for a better indication of this year's crop in the world’s largest cotton-producing markets. The U.S., India, and China each have had some challenges this year, but have managed to wriggle through them without noticeably large problems resulting. South Texas cotton remains parched, with total agricultural losses in the state here approaching a record $4.1 billion. Some eastern provinces in China saw damaging wind and rain from Typhoon Morakot here. And India received unimpressive monsoonal rains earlier this summer, only to enjoy late-season onset of ample precipitation here. However, the stress put on these crops, mostly due to swings back and forth from very dry to very wet conditions, could end up causing lower yields. Traders will likely be hesitant to carry prices strongly higher or lower until they get a better idea of the crop size in the latest USDA report due at the end of the week.