Weekly Commodity Market Recap: Cotton

Last week saw ICE cotton futures jump to their highest weekly close in two months, propelled in part by a weaker dollar and tentative prospects of improving downstream demand. Nearby futures leapt 389 points for the week to settle Friday at 93.52 cents/pound, the biggest weekly advance since the start of the year. While futures sagged only modestly Thursday and Friday, this softness did snap a streak of six gradually higher closes for the market.

Some of last week’s firmer prices rested on more signs pointing to pockets of improving demand across the global textile supply chain. While the market remains a long way from shaking off the full impact of the global destruction of demand that has gripped the supply chain the last few years, green shoots of improving demand suggest a return to modest growth may be close at hand. Most recently, Chinese cotton yarn imports benefitted from higher demand and lower unit costs to expand to a record high in February. Also last week came improving indicators of faster growth in 2012 retail demand for the largest markets in both Europe and Latin America. If these signals take root and spread, global mill demand for cotton may rebound in 2012 as well. Additionally, weekly U.S. cotton exports continue to outpace the average volume needed to reach the USDA’s forecast of 11.0 million bales, suggesting this target may be revised higher soon. Traders’ positions reflect this creeping optimism, as the weekly CFTC report showed Managed Money went from a net short position of over 10,000 contracts the previous week to a net short of just 948 contracts as of last Tuesday.

But partially offsetting some of this enthusiasm is a handful of bearish indicators. First, after touching a seven-week high Wednesday, futures retreated Thursday and Friday, in part owing to a bigger-than-expected Prospective Plantings report from the USDA. The area sown to cotton in the U.S. this spring is expected to reach 13.2 million acres. While this area is 11% less than last year, it is more acreage than many expected, hinting the harvest size may be somewhat bigger than first anticipated, assuming trend yields and abandonment. Additionally, while there are glimmers of hope for Thailand’s beleaguered fiber and textile supply chain later this year, the industry continues to reel from dull demand and last year’s record flooding. And other disappointing signs hint the Spanish apparel market—one of the five biggest in Europe—may go from bad to worse later this year. But perhaps the biggest weight to loom over the market may be the recent suspension of China’s cotton reserve procurement program. This effort effectively propped up Chinese—and by extension, global—cotton prices over recent months. But with no more procurement until the new harvest arrives, the near-record divergence between Chinese and foreign cotton prices may narrow, perhaps with Chinese prices easing to close the gap. Following Wednesday’s near-term high, cotton prices have stalled and there is little sign that demand is rising to meet the market. In fact, commercial traders report little inquiry in the aftermath of the recent rally. The fallout of no more Chinese Reserve purchases may color the market until more attention turns to weather developments as Northern Hemisphere plantings soon commence in earnest.

Questions over Chinese Cotton Imports

A contact heard recently that China purchased Indian cotton, but not for the State Reserve, and asked if we agreed or disagreed.

Yes, we agree that China purchased Indian cotton, but not JUST for reserve (that too) and not JUST Indian growths. Much of the cotton imports of late has been for consignment stocks in China that will be looked over & bought by local mills later.

The big purchases by China (February was second-biggest import month on record) was of Indian, U.S., and Brazilian…India didn’t have all the fun. The U.S. shipped more cotton to China in Feb than any month in nearly six years. What’s more, these big purchases of Indian cotton prompted all the panicky Chicken Little on-again, off-again policy vacillation in India over the cotton export ban. The 800-lb gorilla continues to exert its influence over the global cotton market.

Weekly Commodity Market Recap: Cotton

Cotton markets in the U.S. and around the world edged lower again last week on persistently weak demand prospects, but two new policy moves could limit downside potential well into the spring. ICE cotton futures shed 192 points for the week to settle at 88.23 cents per pound, the lowest weekly close since mid-December. Cotlook ‘A’ Index prices, a proxy for world cotton prices, dipped 70 points from a week earlier to 97.45, the lowest since the start of this year. While sentiment is gathering steam for lower Northern Hemisphere cotton plantings this spring, the demand side of the balance sheet continues to weigh on the global cotton market.

This weakness is spread both geographically and across the supply chain, from East to West and from yarn spinning to retail sales. Most recently, mills in Thailand and South Korea reported another month of soft demand for their textiles, suggesting cotton consumption forecasts for both markets are overstated. Owing to record unit costs and weak foreign demand, Pakistani exports of cotton fabric sank the most in years in January, with volume plunging to the lowest January in more than a decade. Even retail was not immune. While some markets reported upbeat sales, others—like Italy—saw a disappointing December shrink garment sales for the fourth straight year. Until price pressures ease across the breadth of the supply chain and retail demand in several key markets shows sustained signs of a rebound, upstream textile output may remain restrained, weighing on cotton prices.

But at the same time, two new policy developments could help prop up global cotton markets, offsetting some of this bearish weight looming over the market. First, Thursday China announced it planned to boost the Reserve procurement price for cotton starting this autumn. Many believe the move is to partially offset what is likely to be a widespread decline in Chinese cotton plantings this spring. While only a modest 3% increase from the current procurement price to 20,400 yuan per ton ($1.47/pound), the implication is that spot and forward market prices in China—and by extension, around the world—may remain firm through 2012 as well.

The second policy development came Monday from India’s Directorate General of Foreign Trade (DGFT), announcing an immediate suspension of Indian cotton exports. While rumors circulated for days that this move was imminent, the announcement plunged local Indian prices while helping propel ICE cotton futures limit up in early Monday trading. While some in India welcomed the move, others called it regrettable. The perceived rash move is reminiscent of what the market saw almost two years ago when India—the world’s second-largest cotton exporter—last tinkered around their cotton trade policy. Doing so this year—with Chinese mills now as major buyers—could give another black eye to the reputation of the Indian shipper on the global market. Over the last two years, Pakistani mills bore the brunt of the cancelled Indian shipments. But this year it will be the Chinese left empty-handed. We suspect these jilted spinners may not soon forget, suggesting increased inquiries to U.S. merchants & co-ops at a time of relatively thin uncommitted exportable supplies.