Weekly Commodity Market Recap: Cotton

Cotton prices crept higher last week, as concern over the outlook for yield and quality of the Mid-South crop outweighed bearish influences from outside markets. As we feared here, the month concluded as the wettest October in over a century for much of the Delta area planted to cotton, causing the most delayed harvest on record. Additionally, the drenching showers in Delta cropland is impacting quality of the crop, ranging from boll rot and yellowing of the cotton fibers to lower average strength detailed here. While producers in the region are likely to rapidly advance picking under clear skies in the coming week, the damage has been done; the next USDA crop report in a week is likely to show a dramatic drop in the size of the Mid-South cotton harvest, buoying cotton prices.

In the shorter term, price action is likely to remain choppy, as the market ebbs and flows between good and bad news on the economy. Traders were quick to dismiss Thursday’s news of robust expansion in third-quarter U.S. economic activity, after Friday’s disappointing spending data and considering the skewed effect from government spending and one-time stimulus measures in the housing and auto sectors. On balance, the dollar is solidly up from its fourteen-month low set a week ago, hindering continued gains across a wide range of commodities, including cotton.

Total open interest has been on a tear recently, expanding to over 185,000 contracts by late October, the highest in over a year. Not coincidentally, this comes as nearby cotton futures finished last week at their highest weekly close in fifteen months. Even so, speculators widely believe cotton is undervalued, and torrential, record rains across U.S. Delta cotton is compounding speculator resolve. Technical traders see rising prices and open interest and believe another push up is coming. While open interest is at its highest level since October 2008, we note that market open interest stayed above current levels for twenty months prior to last October, suggesting the market may have much longer to persist at or above these levels.