Weekly Commodity Market Recap: Cotton

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After reaching the highest levels in over two years the previous week, overbought cotton futures retreated last week, easing lower each of the first four days before rebounding modestly Friday as traders covered shorts and mills bought at these relatively lower prices. Nearby prices sank 207 points on the week to 84.13 cents per pound, easing in sympathy with a broad swath of commodities as the dollar re-strengthened. Brought on by Greek debt woes that threaten to spread across the European continent, the euro plunged last week, helping boost the dollar to 81.991 Friday, the highest weekly close in over a year. In turn, the higher dollar drove many commodity prices lower, including cotton. Lower unfixed call sales again last week foreshadowed the dip in futures prices. Even so, the CFTC Cotton On-Call position report shows a growing mass of mill buying under the market. Now at 2.6 million bales, the unfixed mill position should help support prices on any speculative related sell-off. The spec long position, which is much larger than the mill short position, has the advantage being able to roll forward. Mills must buy because they need the cotton, and most merchants would be unwilling to roll their contracts forward. It could be an interesting summer even if the weather cooperates.

By late in the week the dip in prices brought new business back to the market, boosted by continued signs of economic growth. The Commerce Department reported first quarter GDP rose an annualized 3.2%, the third consecutive quarter of expansion. What’s more, consumer spending led the growth, hinting at improving demand for cotton textiles and apparel in the world’s largest retail market. While evidence here confirms the recession had a devastating effect on per capita end use of cotton products in the U.S., a rising economic tide is likely to lift all ships, boosting fiber demand in 2010. A lackluster housing market and above-trend unemployment are likely to remain drags on net apparent consumption of cotton, but continued economic growth is likely to offset these negative forces, expanding cotton demand this year.

Away from the demand side, in the shorter term weather will become the dominant factor driving cotton prices, as reports of crop development and condition around the world weigh on the market. After a month of below-normal precipitation, Mato Grosso cotton in Brazil is in need of a good drenching before picking commences in earnest in coming weeks, else yields and production could suffer. Meanwhile, the Australian cotton harvest continues under clear skies and normal temperatures, boosting yield and quality prospects. With abundant year-to-date moisture levels here, tentative sentiment for higher yields in West Texas is widespread, while concern is mounting across the Southern Delta over too little rainfall. Given the persistent inversion in price between nearby contracts and more distant contracts, the market has long been hinting at a larger autumn harvest and increasing supplies for months. The question is whether—and how soon—this convergence in price between contract months happens as prices for more distant months firm, or if Nearby prices ease lower on signals of stumbling demand. Presently, we are not confident that either event will happen soon, suggesting this backwardation in the market may persist.