Weekly Commodity Market Recap: Cotton

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The cotton market digested a slew of new data last week ranging from tighter raw cotton fundamentals to lackluster domestic clothing store sales, but offsetting sentiment left futures trading relatively listless and little changed for the third straight week. The market began the week on a sanguine note following upbeat reports of improving retail demand in Germany here and France here, two of Europe’s largest apparel markets. Double-digit growth across most sectors of China’s textile industry propelled textile prices here to the highest levels this year, contributing to the bullish sentiment. Coupled with the first growth in textile and apparel output in Turkey in over a year and a half here, global textile markets are as optimistic on the future as they have been in two years.

But perhaps a telling event came Thursday on the release of the latest USDA supply/demand forecasts for this marketing year. While the lower-revised ending stocks exactly matched FCStone forecasts here and produced the most bullish stocks-to-use ratio in over a year and a half, the market effectively shrugged off the news, with futures stalling against overhead resistance and probing for underlying support. Pundits argue that the market may have already factored in these fundamentals. In fact, breaking news reported here last week that China would distribute quotas in April 2010 for another million tons of cotton imports did little to move the market. It seems no bullish news is able to drive futures higher, suggesting overbought conditions and a pending correction. Of course, funds simply may be taking money off the table prior to the year end, contributing to the lack of upward movement in price. Or the recent rebound in the dollar to seven-week highs may be hindering enthusiasm for higher fiber prices. Regardless, the stall has us concerned.

We won’t rule out that a dip may occur, but sentiment remains increasingly bullish both from the trade and speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain lackluster until after the New Year. Looking further into 2010, we also remain cautiously bullish through the winter, but acknowledge that a likely rebound in cotton plantings in the U.S. and China here this spring may temper enthusiasm for even higher prices that are already well above their long-term average.