Weekly Commodity Market Recap: Cotton

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The holiday-shortened week saw a flurry of reports from around the globe that worked to tug the cotton market higher and lower, resulting in another week of little net change in cotton prices headed into the final trading week of the year. Over the last month, nearby cotton prices remain constrained to a relatively narrow 478-point trading range, with prices retreating three of four days traded last week closer to the lower end of that range. Even so, at 73.65 cents/lb, last week’s close suggests that cotton prices are poised to finish the year higher eight of the last nine months, with the highest monthly close in more than a year and a half.

Helping drive prices higher, reports last week added to sentiment of improving demand around the world. Evidence here shows cotton imports into Thailand—the second-largest cotton-consuming market in Southeast Asia—soared at the fastest pace in four years, spurred on by a re-strengthening currency and robust demand for cotton yarn exports. Fiber and textile prices in China here climbed to a 13-month high as output in the world’s largest textile producer re-accelerated even further. Similarly, Indian cotton textile production here jumped at a double-digit pace in October—the biggest increase in two and a half years—spurred on by the first year-over-year increase in textile exports in over twelve months. Further downstream, Canadian clothing store sales detailed here rose for the first time in thirteen months in October, supported by improving economic conditions in our neighbor to the north.

But to be sure, not all measures of demand last week were optimistic, offsetting the enthusiasm for higher cotton prices. Here, a streak of successive declines in German textile exports over the last two years is likely to drag textile output in this market to the biggest drop on record in 2009. And annualized mill consumption of cotton in the U.S. sank for the 23rd straight month in November here, falling just below the latest USDA projection for 2009/10, suggesting this forecast may be mildly overstated. U.S. cotton exports also continue to fare poorly in the latest week, and remain well off the pace necessary to reach the latest USDA forecast of 11.0 million bales this marketing year. Adding to the bearish concern, the latest data show Russian cotton yarn and fabric output are both likely to see a record plunge in 2009, with volume falling to the lowest levels years. And finally, while data from MasterCard Advisors' SpendingPulse estimated U.S. holiday sales expanded 3.6%, the report showed lower sales of women’s and specialty apparel, echoing our concerns for the crucial holiday shopping season here.

These offsetting signals add to the market’s hesitation and lack of clear direction in recent weeks. And after climbing each of the last three weeks, the dollar wavered last week, further clouding the outlook. We continue to think price may be near the bottom of its recent consolidation range, and may trade modestly higher into the New Year. But longer term, we look for U.S. spring cotton plantings to jump at a double-digit rate from last spring’s low, suggesting increased supplies will help counter the global trend of improving demand prospects in many markets, moderating the long-term uptrend in price.