Weekly Commodity Market Recap: Cotton

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After rocketing ahead in February to its highest point in two years, cotton futures prices retreated last week, falling four of five trading days as the latest WASDE report from the USDA failed to impress and prices responded both to overbought technicals and mounting concerns about the economy. The Nearby finished the week at 80.47 cents per pound, off 1.96 cents from the week before. As we suspected here, the latest USDA forecasts saw global production ease, while U.S. fundamentals were little changed from the previous month, supporting our notion that global drivers would have more of an impact on the market this week than the domestic market. In fact, one could argue that the ‘news’ of a smaller global crop had already been factored into the market, as this information had been widely publicized for some time. Aside from this issue, there were few fundamental surprises in the report to drive price, allowing bearish technicals and outside influences to dictate price for the week.

Weighing negatively on the market this week were several overbought indicators and more worries about the U.S. economy. For example, as prices soared to their two-year high in early March, the RSI signaled the need for a correction. At 77.72, this indicator reached its highest level in 21 months, a few standard deviations away from its long-term 50.0 mean. Economic news last week also weighed on the market. Among other news, weekly U.S. jobless claims for February were higher than expected, and Chinese inflation rose to a sixteen-month high, hinting that tighter monetary policy may stifle rapid consumer demand there later in 2010.

But after four straight losses, prices rebounded on Friday, recouping mid-week losses. Stronger-than-expected February retail sales figures encouraged shorts to cover on Friday, in spite of sagging clothing store sales. A weaker dollar on Friday also fueled speculation of a likely improvement in relatively unimpressive U.S. export sales. Friday’s Commitment of Traders report showed the large specs adding 4,101 longs and 412 shorts to their combined futures and options position in the week ending March 9th, helping spur the improvement in price. Technically, trades formed a ‘bullish engulfing’ pattern on the Japanese candlestick charts. What’s more, Chinese futures prices rebounded Monday, with Nearby ZCE prices reaching 16,295 yuan per ton ($1.08 per pound), close to the ZCE record-high set in early January. This late-week turnaround leaves us believing the market may have found significant near-term support. The longer-term question remains as to how much global cotton acreage will expand this spring, and how much further the bulls will drive the market before bigger crop prospects come into focus this fall.