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.