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.