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.