Weekly Commodity Market Recap: Cotton

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Last week’s cotton market ended with little net change for most ICE Futures U.S. contracts, which masked a roller-coaster week consisting of a Wednesday plunge offsetting four ‘up’ days for the market. As July entered First Notice Day on Thursday, most attention turned to December and how global supply/demand fundamentals may drive this heavily-traded contract. Last week, much of the southeastern U.S., eastern China, and northern India continued to bake under hotter-than-normal conditions. Relief may be on the way for these areas in coming days, suggesting some improvement for the crops in these key regions of the world’s three largest producers.

Also on the supply side, rumors continue to swirl that China is about to boost the quantity of cotton available for domestic mills. While speculation on this issue has persisted for weeks, The China Cotton Association announced late last week the government plans to issue additional import quotas as early as this week. If this proves true, the rumored amount could push the total quotas issued this marketing year to 3.6 million metric tons (16.5 million bales), the second-highest year for imports on record.

But offsetting this good news for foreign exporters, confirmation came last week that China plans to release additional supplies of cotton from ample state reserves for the second time in a year. At 600,000 tons (2.8 million bales), this volume certainly would alleviate spinning mills’ tight inventories and likely would ease skyrocketing prices for domestic cotton within China recently reported here. While the commencement date, length of release, and rate of release have not been announced, if it echoes the earlier release announced here, it could throttle back recent soaring prices in the market.

On the demand side, signs of gradual improvement for the world economy are helping support cautious optimism for a continued rebound in global mill use of cotton. Aside from the well-reported gains in textile output in the major producers across Asia, several smaller producers also are showing improvement. Reports just last week from several mid-tier cotton-consuming industries around the world reflect this trend, including Colombia here, Russia here, the U.S., and the Philippines.

This pattern suggests that not only is global mill demand for cotton likely to outpace production again in 2010/11 as we have anticipated for months, but cotton use may be poised to climb beyond current forecasts, suggesting even more pressure on already-tight global cotton stocks. In fact, the latest USDA forecast pegs global cotton mill demand for the upcoming marketing year higher by 400,000 bales from its projection just a month earlier, which itself is up 2.7 million bales from this marketing year’s estimate. What’s more, we would not be surprised to see consumption forecasts climb higher in coming months, commencing as early as next week. If so, 2010/11 will mark the fifth straight year that global mill demand for cotton outpaces cotton production, drawing down cotton inventories worldwide and supporting the notion that average prices are likely to remain elevated in coming months.