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.