Weekly Commodity Market Recap: Cotton

Unfolding events last week generally were friendly to the market, helping nearby cotton futures reach the highest daily close in fourteen months, before a collapse in technicals settled the week’s activity with little net change from the previous week. The remnants of Hurricane Ida drenched open-boll cotton from Alabama to Virginia last week, with pockets receiving up to eight inches of rain in hardly 48 hours. In particular, the North Carolina crop, which had been expecting record yields prior to the arrival of the storm, roughly 330,000 potential bales of cotton still on the stalk in the state were exposed to excessive rainfall, strongly suggesting quality may be seriously compromised as a result. Gusty winds later in the week then blew much of the heavy, soaked bolls to the ground, where they are unable to be harvested, implying yields in the state also may suffer.

Tuesday’s release of new supply/demand forecasts from the USDA generally mirrored our forecasts here, showing an outlook for tighter fundamentals, both in the U.S. and worldwide. A 502,000-bale decline from just last month in the anticipated size of the U.S. crop is likely to result in the smallest harvest in two decades. Similarly, the USDA shaved another million bales off the size of the Chinese crop for the second straight month, while historic revisions to Bangladeshi cotton consumption propelled mill demand there to a record 4.0 million bales this year. On balance, lower production and higher demand reduced projected ending stocks from last month both in the U.S. and worldwide, resulting in tighter stocks-to-use ratios, fundamentals friendly to prices. Accordingly, nearby futures closed Tuesday at 75.11 cents per pound, matching the highest close since August 2008.

Technical trading ruled later in the week, with cotton receiving little, if any, assistance from outside markets. Nearby futures moved in mirror-opposite step to the dollar each of the last nine sessions, and settled lower in the second half of the week as the dollar rebounded off fourteen-month lows. After climbing to a fourteen-month high in late October and establishing firm resistance, cotton prices remain constrained to a three-hundred point trading channel over the last few weeks. In the shorter term, we look for the market to take a second look at support levels at 69.75 and 68.80 cents per pound before challenging Tuesday’s fourteen-month high of 74.27 cents in the longer term.