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.

Weekly Commodity Market Recap: Cotton

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Futures prices rebounded during last week’s holiday-shortened trading, as a decline in the dollar and robust export sales were friendly to cotton prices, with futures remaining well within a six-cent trading range established over the last six weeks. Nearby cotton prices rose 181 points on the week to close at 81.50 cents per pound, with three days of higher prices offsetting Tuesday’s modest decline. Traders last week viewed the USDA’s Prospective Plantings report as a non-event. The 10.5 million-acre forecast for spring plantings was close to market consensus and our own projection discussed last week here. With this outlook already factored into the market, traders instead discerned price direction from other factors.

A more pronounced impact on the market came from a weaker dollar, which boosted prices for several commodities, including cotton. The U.S. Dollar Index lost over half a point last week, closing at 81.44. This spurred oil prices to almost $85/barrel late last week, nearing the highest point in seventeen months. Oil also is likely to benefit from Friday’s sanguine jobs data, igniting hopes of a pickup in energy demand. Longer term, higher oil prices could support higher synthetic fiber prices, helping shift demand back to cotton.

The weaker dollar also boosted prices for a host of commodities, helping drive the rebound in cotton prices. The Reuters/CRB Index jumped last week to more than 276.4, nearing its highest level in two and a half months. Part of the positive commodity price action was attributable to more positive manufacturing news. The latest report from the Institute for Supply Management showed manufacturing activity made its largest jump since 2004. The increase was driven by significant growth in new orders and production. Almost all manufacturing sectors screened in the report showed a jump in activity, echoing the vigor we are witnessing in the domestic textile sector. While the rise in this basket-price of commodities did little to boost prices last week for crops that compete with cotton for southern acres—particularly corn, wheat, and soybeans—the increase cemented sentiment that cotton will reclaim a large swath of acres lost to other crops over the last two years.

Closer to home, two key indicators helped propel cotton prices higher on the week. First, weekly export sales were surprisingly good with a total of 279,000 bales in new sales recorded. Shipments were also excellent at 301,500 bales. Also, rumors are spreading that China—the world’s largest cotton importer—is likely to increase its import quota again in coming weeks, boosting prospects for additional shipments before the end of the marketing year. This evidence prompted us to revise our U.S. export forecast higher than the USDA here, friendly to higher prices. A second key indicator is the recent surge in unfixed call sales. At 70,424 contracts, the volume in unfixed call sales is the highest in over two years, helping weekly cotton futures rebound to one of the highest closes in over two years.

As the marketing year winds down, trading in coming days is less likely to be influenced by the next USDA WASDE report due Friday and more likely to be driven by weather developments. We look for April’s WASDE to show modestly tighter fundamentals in the U.S., mostly due to higher U.S. exports this marketing year. But small adjustments to old-crop fundamentals also are likely to become more of a non-issue in coming weeks, as the market’s attention turns to the size of spring plantings in the northern hemisphere and weather conditions after germination.

Weekly Commodity Market Recap: Cotton

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Futures prices eased lower last week, remaining well within a six-cent trading range established over the last five weeks as concern mounts over soaring fiber costs and higher domestic cotton plantings this spring. Nearby cotton prices retreated 2.49 cents to finish the week at 79.69 cents per pound, the lowest weekly close since mid-February. While the fundamentals continue to point to higher prices for the 2010/11 marketing year, near-term bulls are running out of steam, promising to make for volatile spring trading.

A handful of factors that contributed to drive prices higher in recent months seem to be losing steam in recent days. First, on the old-crop supply side, government efforts in China to relieve transportation bottlenecks in Xinjiang Province—China’s largest cotton producer—finally seem to be having their desired effect. Daily railcars for moving cotton from farms in the West to mills in the East increased to 170-180 since March 23, and could possibly increase further to 250. While this is rather late in the procurement season for the area, the increase is likely to ease supply constraints somewhat, whether actual or perceived. Additionally, the dollar is trading at a nine-month high on European debt concerns that are sinking the euro, hindering gains in commodity prices.

On the demand side, complaints from downstream producers in different markets are mounting over perceived exorbitant yarn prices. Indian knitwear manufacturers are unsettled over soaring cotton and yarn prices, with reports suggesting the sector is planning to ask buyers to pay one-fifth more to meet rising yarn prices. Similarly in neighboring Pakistan, angst over soaring yarn prices and perceived tight supplies here is pitting the yarn sector against downstream interests like never before, with the exasperated government unlikely to find a suitable compromise to satisfy both sectors. In China, rapid gains in cotton and yarn prices also are eating into the profit of downstream manufacturers. In particular, smaller yarn and fabric makers are cutting production or increasing polyester use as we demonstrated here to combat the surge in cotton fiber and yarn prices.

Another consequence of the sustained rise in cotton prices witnessed over the last year is likely to be a dramatic jump in cotton acreage in several key producers around the world. In particular, an issue likely to be closely watched by the market this week is the annual Prospective Plantings report from the USDA. This report is expected to show increases of 1 to 1.5 million acres, with potential production of 16 million bales or more. This would mark a reversal in trend from the declines witnessed over each of the last three years and a dramatic rebound from the 9.1 million acres planted a year ago, the lowest in more than a quarter century. While a 16 million-bale crop is comparable to the average volume produced over the last three decades, it is much larger than the harvest sizes each of the last two years. While we remain bullish for price over the long term, these issues are likely to temper much of the enthusiasm for robust gains in price witnessed over the last year. Instead, more modest gains in the long term may be more likely, while downstream resistance from fabric and apparel manufacturers is likely to make for choppy trading in coming weeks.

Weekly Commodity Market Recap: Cotton

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Cotton prices managed to rebound last week, in spite of mounting bearish evidence hinting at the increased potential for a pullback. Viewed from the bulls’ perspective, cotton’s climb last week came on news of higher unfixed on-call sales and the biggest U.S. cotton exports in nine months. The CFTC’s latest Cotton on Call report indicates unfixed on-call sales are growing at a rapid pace, particularly in the July contract. Total unfixed on-call sales merchants made to textile mills jumped to 68,829 contracts, the highest in two years, supporting higher ICE futures. The July contract rose by 816 contracts to a record 23,159. There are only 11,713 unfixed on-call purchases merchants have made from growers, providing very little in the way of an “offset”. As mills continue to add to their on-call position, it represents more futures that will need to be bought during a smaller window of time, suggesting higher prices are likely.



The bulls also point to the latest report of robust sales and shipments abroad for cotton. Total exports of Upland and Pima cotton reached 312,661 480-lb. bales in the week ending March 11, driven by soaring volume to America’s largest market. Exports destined for Chinese textile mills surged to 152,268 bales, the highest level so far this marketing year. In fact, this weekly volume was almost as much as the U.S. shipped to all other markets combined, reflecting China’s expanding share of total U.S. cotton exports over the last several months. The surging shipments to China in recent weeks echo our observation here of rapid growth in total Chinese cotton imports and suggest cumulative U.S. exports to China this marketing year may climb to the second-highest level ever recorded, something certainly bullish for price.

But from a stronger dollar to higher acreage forecasts for spring plantings, different bearish indicators are looming and likely to offset much of the enthusiasm for higher prices in coming weeks. Greece’s ongoing debt problems led to a weaker euro and stronger dollar last week, limiting gains on commodities. The U.S. Dollar Index finished the week higher at 80.7, rivaling its highest level in 21 months and hindering gains across a variety of commodities.

Finally, some price impacts may be coming from excellent topsoil moisture reports across the South and private acreage estimates released last week. One planted acreage report disseminated last week pegged spring U.S. cotton plantings at 10.3 million acres, well up from a year earlier. The market is likely to trend sideways in coming days, in anticipation of the March 31 Prospective Plantings report from the USDA. While the market looks for an increase in cotton acres this spring, the question is how much. Certainly, weather in coming months will impact yields—something difficult to accurately gauge this early in the year—but one early hint at the potential for better-than-average yields is ample topsoil moisture. The latest nationwide map here shows much of the South is wetter than normal, with no cotton acres reported as abnormally dry. This early sign hints that the surge in price over the last year may slow in coming weeks under the weight of a much larger cotton crop.

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.

Weekly Commodity Market Recap: Cotton

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After surging ahead in recent weeks on the outlook for tighter domestic and global fundamentals, cotton prices moderated last week in advance of the USDA’s next WASDE report, easing as technicals turned increasingly overbought. At 84.60 cents per pound, intraday trading last week reached the highest level in two years, following three straight weeks of gains that saw nearby futures soar 17 cents in less than a month. But the market may have overreached—at least for the time being—suggesting prices may consolidate in the short term as attention increasingly turns from tighter old-crop fundamentals to the longer-term outlook for a bigger U.S. and world harvest this autumn.

Wednesday’s WASDE report is likely to show few changes in U.S. old-crop fundamentals, tempering the recent streak of gains in domestic prices. Evidence suggests the U.S. balance sheet only may tighten marginally if at all, while global production is likely to see a more pronounced decline. We have long argued here that India’s harvest size may be overstated, and recent forecasts from China’s NBS here may color the USDA’s projections this week. This suggests global drivers may have more of an impact on the market this week than the domestic market, contrary to the trend reflected over recent months in the graph below.

On balance, futures trading last week was quiet and mostly dull, with traders focusing on the consensus outlook emanating from the International Cotton Association conference in Singapore. After the week’s high was set Monday and the low set Tuesday, trading during the rest of the week remained within that range, with volume well below trend. Presenters’ comments at the ICA meeting were mostly bullish, suggesting that supplies will remain tight through 2010, but likely higher plantings this spring in a number of markets are likely to boost global cotton supplies in 2011, unless crop troubles in China or India cause prices to “explode”. With the global economy on the rebound, increased demand for cotton in the new marketing year is all but certain. As a result, the longer-term outlook for price will be heavily influenced by how much global production rebounds, causing the market now to increasingly turn its attention to pre-plant weather conditions in key markets around the world.

Weekly Commodity Market Recap: Cotton

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Since trading at an eighteen-month high early this year, nearby cotton prices fell fourteen of the last eighteen trading sessions, down for four straight weeks. At just 69.03 cents per pound, Friday’s close is the lowest in two and a half months. While some fundamental signals last week in the cotton market improved, this latest week’s decline came in response to a strengthening dollar, lower oil prices, and weaker bean and grains prices.

First, demand-side indicators for cotton firmed last week, but did little just yet to stanch the hemorrhaging in price. Weekly export sales discussed here climbed to the highest in eleven months, driven almost entirely by robust purchases by China. Similarly, cumulative Pima cotton exports so far in 2009/10 total more than 495,000 bales, over ten times the volume shipped by this point last year, accounting for much of the recent escalation in price for this species here. Even U.S. mill demand is showing signs of life. Recent months’ annualized cotton usage in domestic mills is averaging higher than the USDA’s latest 3.4 million-bale forecast, helping support the market. But in spite of these signs of improved demand prospects, external influences maintain a heavy influence over cotton, dragging prices lower again last week.

In particular, the resurgent dollar is weighing on a host of commodity prices, including cotton. Since reaching an eighteen-month low in November, the dollar is up six of the last nine weeks, closing Friday at 79.65, its highest weekly close in more than six months. Better-than-expected GDP data in the U.S. last week suggest the U.S. economy is recovering more rapidly than its European or Japanese counterparts, helping spur the greenback higher. A slew of key economic reports this week—including non-farm payroll data—will shed more light on this notion and will direct the dollar further in coming days. Over the last several years, few variables have had as large an impact on cotton prices as the value of the dollar. This trend continues in 2010, as the rebound in the dollar is pulling cotton prices lower, as the graph below shows.

Moving in tandem with weaker cotton prices, crude oil prices are also lower each of the first several weeks of 2010. Since reaching a fourteen-month high early this year, the price of a barrel of crude has fallen over ten dollars to a three-week low of $72.89 amid concerns over Chinese monetary policy and U.S. banking regulations. Analysts expect geopolitical tension, ongoing financial risks and further liquidation of speculative long positions to continue to weigh on oil prices in coming weeks, hindering any rebound in smaller markets for other commodities like cotton.

Likewise, the drag on cotton prices from a stronger dollar and weaker oil prices so far this year is being felt in corn and soybean prices. As prices for all three have eased over the first few weeks of the New Year, we don’t look for this to have a marked decline on the outlook for U.S. plantings this spring. While cotton is lower from a few weeks ago, so too are other crops, and cotton is still trading for a relative premium against these other crops versus this time last year. Accordingly, we maintain our outlook that cotton plantings in the U.S. will rebound in coming months, perhaps upwards of 10%, outpacing the percentage increase in corn or bean plantings. This implies U.S. area may exceed 10 million acres, well up from last year’s 9.15 million acres, the lowest in over a quarter century.

Weekly Commodity Market Recap: Cotton

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Cotton futures retreated for the third straight week last week, dropping more than a cent to the lowest weekly close since mid-November in response to a stronger dollar, weaker alternative crop prices, and credit concerns in China. The 2010 retrenchment in price continued last week, with nearby futures easing lower three of the four trading days during the holiday-shortened week, before settling Friday at 71.07 cents per pound.

One key issue weighing on cotton prices is a resurgent dollar. The greenback rose sharply last week, boosted by a weaker euro, news that China was tightening its monetary and credit policies, and an increase in demand for lower yielding assets. The U.S. Dollar Index finished the week at 78.43, its highest weekly close in five months. In addition to cotton, the stronger dollar also weighed on prices for other ag commodities, dragging cotton lower.

Corn, wheat, and soybean prices all extended their 2010 declines again in the latest week, in concert with lower cotton prices. However, the losses in other key competing crops outpaced the latest weekly decline in cotton prices, implying these other crops dragged cotton prices lower. Since the start of the year, nearby cotton futures are off 6.5%. But wheat, corn, and bean prices are faring even worse, falling between 8-13% over just the first three weeks of the year. These relatively lower prices for other crops support our earlier outlook that cotton may buy back land for spring plantings in a number of markets, particularly the United States.

Finally, the week brought news of efforts in China to slow lending in order to ease concern of a ballooning credit bubble and proactively tamp out inflationary sparks. The country’s regulatory commission instructed banks to slow access to loans in order to tighten loose credit standards. However, Chinese textile and apparel manufacturers already have seen growth in capital investment in the sector slow considerably in recent years. Any further restrictions on new investment may crimp fiber demand longer term, hindering the price outlook.

The decline in U.S. cotton futures prompted another strong week of exports. The latest export sales report pegged net new sales of upland and Pima at 347,000 bales, one of the strongest showings this week. Similarly, weekly exports climbed to 233,000 bales, the second-highest level this marketing year. China remains—by far—the largest buyer of U.S. cotton, but we look for interest from the region to slow as the Chinese New Year approaches in mid-February.

Barring another financial market meltdown or a double-dip recession, our opinion remains that cotton demand will continue to outpace production (even with a presumed increase in plantings). As we discussed last week here, mills are still quite short, and still have on-call contracts that need to be fixed. For these reasons, we believe that while cotton may trade lower in the next few days or even the next few weeks, it will find underlying demand limiting its downward correction witnessed over the first few weeks of the New Year.

Weekly Commodity Market Recap: Cotton

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The corrective consolidation in prices extended into the latest week, as weaker cotton fundamentals, plunging Chinese prices, and lower commitments of traders data weighed on U.S. prices. The nearby March contract finished the week down a modest 36 points from the week before, at the lowest close since mid-November.

The week began with an impressive 180-point jump Monday, buoyed by a weaker dollar and sentiment for tighter global ending stocks in Tuesday’s WASDE report from the USDA. However, the optimism for higher prices sagged Tuesday, with prices falling three of the next four days following release of the WASDE report. Tuesday prices gave back most of Monday’s gains, falling 145 points. While USDA projections for U.S. fundamentals closely matched FCStone forecasts, the USDA figures for global supply and demand were more bearish than the market had anticipated. The bearishness carried over into the following day, when Wednesday prices tested the previous week’s low of 72.43, before closing at 73.43, up 64 points. The only other note of bullishness came Thursday following the release of the U.S. export sales report. At 460,726 480-lb. bales of Upland and Pima, sales climbed to a marketing-year high. Similarly, exports jumped in the latest week to 211,891 bales, the biggest volume since early October. Cotton destined for China accounted for the bulk of the surge, with weekly shipments the most in eight months. But in spite of this news, prices eased lower each of the last two days of the week, finishing at 72.08—a seven-week low—sunk by weaker Chinese prices and a stronger dollar.

Even as prices have eased from recent highs on the ICE Futures U.S. exchange, prices on China’s Zhengzhou Commodity Exchange have fallen much faster, weighing on global markets. Since peaking on January 4, the most-traded May contract is off 1,010 yuan per metric ton (6.72 cents per pound) to 15,830 yuan per ton, outpacing the 3.92-cent drop in March futures on the ICE exchange. Market open interest is well off its record peak set two weeks ago as well, falling by more than a third. The plunge both in open interest and prices on the ZCE is pulling market prices on this exchange closer into parity with U.S. futures prices, something we anticipated here.

U.S. futures also are easing lower on signals from the trade. First, reports of lower unfixed call sales from the CFTC weighed on futures prices last week. A significant net reduction took place on the mill side in unfixed on-call positions during last week's price skid, where mills fixed prices on 3,324 lots to reduce unfixed call sales to 49,548 lots. Unfixed holdings on the producer side increased a net 46 lots to 10,524. A second report from the CFTC showed funds and speculators cut cotton futures-options net longs to lowest combined total since week ended Nov. 24, trending in step with the decline in futures prices. Commercials reduced net shorts to 53.2% of open interest, down 10.7 percentage points from eight weeks earlier. Meanwhile, funds and speculators reduced their net longs by a combined 8,587 lots in cotton futures with options during the week ended last Tuesday, according to supplemental data reported by the CFTC Friday. They were net long a combined 131,333 lots, the lowest since the week ended November 24. Trend-following funds trimmed their net longs by 6,255 lots to 41,049, index funds pared theirs by 2,281 lots to 78,055 contracts, and small specs cut theirs by 80 lots to 12,299. The reduction by index funds came on the heels of earlier expectations for a fresh influx of money into the cotton market around the first of the year as a result of rebalancing and has sapped much of the market’s enthusiasm for higher prices.

As a result of the weaker global fundamentals, steep drop in Chinese prices, and unexpected declines in traders’ commitments, futures prices are well off their early-January highs. However, merchants still need to purchase more futures contracts than sell in order to even out their on-call positions, suggesting sentiment has not tilted to the bears just yet. We continue to expect prices to move sideways to higher over the next few weeks, once this correction is fully digested. But should alternative row crops remain at current levels, this divergence in prices will likely prompt a modest increase in U.S. cotton plantings in the spring, which longer term may stem the gains in cotton prices.

Weekly Commodity Market Recap: Cotton

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A barrage of bearish data weighed on cotton prices last week, dragging U.S. and Chinese markets lower into an overdue correction, consolidating and setting the stage before prices resume their gradual march higher this winter. Following a move to new highs early last week, cotton prices on the ICE Futures U.S. tumbled three of the next four days, finishing Friday at 72.44 cents per pound, the lowest level in seven weeks. Several issues together pulled prices lower on the week, including prospects for looser anticipated global fundamentals on Tuesday’s WASDE report, rumors of fund balancing, lower Chinese futures prices, and the Chinese central bank’s raising of interest rates.

First, market sentiment points to higher global cotton production forecasts when the USDA releases its next WASDE report Tuesday morning, boosting anticipated carryover stocks. Here, beneficial rains across the eastern third of Australia over the last half month continue to ease crop concerns from just a few months ago. While the crop there still needs ample moisture during the crucial February fruiting period, ample December and January showers dramatically boosted yield prospects for one of the world’s leading cotton exporters. Similarly, excellent crop conditions across much of the Brazilian cotton belt here are helping improve harvest prospects in the Southern Hemisphere’s largest producer this year. Additionally, the latest data on the robust pace of cotton arrivals in Pakistan here continue to support our long-held view that production forecasts in this market remain too conservative. Together, should these harvest sizes be revised higher as we anticipate, the increase in global supply could temper much of the near-term enthusiasm for continued price gains.

A second issue that weighed on cotton prices last week was rumors of fund rebalancing and a rebound in the dollar. According to the CFTC Commitments of Traders Report, for the week ending January 5th, index funds were net sellers of only 123 contracts, which reduced their net long position to 80,336 contracts. Hedge funds, however, were more aggressive sellers, decreasing their net long position by 4,423 contracts to stand at 41,032. But several market watchers see this as profit-taking by long-only funds, and not an indication that index funds are any less bullish.

The dollar also dragged on many commodities last week, including cotton. In the first full week of trading in the New Year, the U.S. Dollar Index rebounded to 77.655, a three-week high. But Friday’s disappointing jobs report and higher oil prices are likely to temper gains in the greenback in coming days, improving the near-term outlook for cotton.

Lastly, U.S. futures prices were heavily influenced by China’s impact on the market. Plummeting cotton prices on China’s Zhengzhou Commodity Exchange (ZCE) dragged U.S. prices lower. The most-traded May contract on the ZCE fell 570 yuan per ton last week (3.8 cents per pound) on plunging volume and open interest, the biggest weekly drop in months. The drop in futures came as The People's Bank of China Thursday raised the interest rate on its three-month treasury bills for the first time since this summer, stoking fears that Beijing could start tightening monetary policy in the coming months. Market perception is that as the Chinese attempt to gently slow economic growth and head off inflation, consumption of raw materials will slow. This policy shift reverberated across cotton markets around the world, driving prices lower.

While we acknowledge the overdue need for this corrective consolidation in prices, we continue to expect prices to continue to move sideways to higher over the next few weeks, which will likely prompt a modest increase in U.S. cotton plantings in the spring.

Weekly Commodity Market Recap: Cotton

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Cotton enjoyed another week of gains, finishing the year with its highest weekly close since the March 2008 spike. Re-strengthening global demand signals continue to support price, along with soaring trade on China’s Zhengzhou Commodity Exchange (ZCE). A firmer demand picture came into focus this last week, framed by good news in several markets. U.S. export sales of Upland cotton hit a marketing year high of 349,576 bales during the previous week, with much of these sales to China. News of another month of double-digit growth in Pakistani cotton yarn exports here suggested fabric mills across Asia are ramping up production. Likewise, Thai cotton yarn exports detailed here soared at the fastest pace in six years, echoing this sentiment. Downstream, faster growth in retail apparel sales in several markets including Taiwan, Canada, and Poland here confirms the improving prospects for cotton mill demand, as once-wary shoppers begin to return to stores in key markets around the world.

A second key driver impacting prices both in the U.S. and around the world has been the impressive performance of futures trading on China’s ZCE. Prices on the most-trade May contract stand at a record level, followed by soaring volume and open interest. As we discuss here, in just the last week, the May contract soared 835 yuan (5.55 cents per pound) to its new record, as volume more than doubled over the same short period to a record 584,560 contracts. Short supplies, transportation bottlenecks, and faster growth in mill demand for cotton are helping propel Chinese cotton futures prices to these uncharted heights, but the potential for increased cotton plantings this spring may ease price pressure in coming months.

In light of these bullish fundamentals, we look for prices to continue to move sideways to higher over the next few weeks, which will likely prompt a sizable increase in U.S. cotton plantings in the spring. Wednesday morning the market will digest the latest economic outlook from the National Cotton Council, followed by a detailed supply/demand outlook from the International Cotton Advisory Committee and comments on regulatory oversight of the cotton market from CFTC Commissioner Michael Dunn. These reports could have an impact on both trading and price action in coming weeks, and will warrant close attention.

Weekly Commodity Market Recap: Cotton

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As the holidays approach, the U.S. cotton market remains relatively quiet, locked in a narrow 240-point range over the last month, with little fundamental news of substance to steer price higher or lower in recent days. In the bears’ camp, most commodities were on the defensive last week as the dollar index rallied from its lowest level since August 2008 to a three-month high. Corn, wheat, and soybean each edged lower last week as the greenback rose for the third straight week. Also, a Memphis-based forecasting group released one of the first crop outlooks for 2010, calling for domestic cotton acres to expand about 10% from this year’s quarter-century low to 10.0 million acres. And while the longer-term outlook for the global textile complex continues to improve in the wake of last year’s economic contagion, several markets around the world still saw output fall again in the latest month—albeit at slower rates—postponing any premature calls of the end of the global textile recession.

The bulls take comfort from a few bits of news last week, offsetting the bears’ momentum and keeping cotton prices range-bound. Retail apparel markets in several countries continue to percolate, suggesting better, frothier days lie ahead. And news from China indicates that output in most sectors of China’s textile behemoth continues to re-accelerate, shaking off the lingering effects of last year’s slowdown. Shorter term, we are wary of choppy trading on holiday-induced lower volumes as the market trudges through this latest consolidation pattern. We remain cautiously bullish on price in the medium term, but believe the outlook for increased global plantings longer term will suppress the market’s exuberance for higher prices into the spring.

Weekly Commodity Market Recap: Cotton

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The cotton market digested a slew of new data last week ranging from tighter raw cotton fundamentals to lackluster domestic clothing store sales, but offsetting sentiment left futures trading relatively listless and little changed for the third straight week. The market began the week on a sanguine note following upbeat reports of improving retail demand in Germany here and France here, two of Europe’s largest apparel markets. Double-digit growth across most sectors of China’s textile industry propelled textile prices here to the highest levels this year, contributing to the bullish sentiment. Coupled with the first growth in textile and apparel output in Turkey in over a year and a half here, global textile markets are as optimistic on the future as they have been in two years.

But perhaps a telling event came Thursday on the release of the latest USDA supply/demand forecasts for this marketing year. While the lower-revised ending stocks exactly matched FCStone forecasts here and produced the most bullish stocks-to-use ratio in over a year and a half, the market effectively shrugged off the news, with futures stalling against overhead resistance and probing for underlying support. Pundits argue that the market may have already factored in these fundamentals. In fact, breaking news reported here last week that China would distribute quotas in April 2010 for another million tons of cotton imports did little to move the market. It seems no bullish news is able to drive futures higher, suggesting overbought conditions and a pending correction. Of course, funds simply may be taking money off the table prior to the year end, contributing to the lack of upward movement in price. Or the recent rebound in the dollar to seven-week highs may be hindering enthusiasm for higher fiber prices. Regardless, the stall has us concerned.

We won’t rule out that a dip may occur, but sentiment remains increasingly bullish both from the trade and speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain lackluster until after the New Year. Looking further into 2010, we also remain cautiously bullish through the winter, but acknowledge that a likely rebound in cotton plantings in the U.S. and China here this spring may temper enthusiasm for even higher prices that are already well above their long-term average.

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

For companies thinking cotton is just cotton, the market has some surprises in store. Although the overall quality of cotton globally may be increasing, how the improvement is occurring remains surprising--long staple cotton has expanded to become the dominant type of quality cotton produced today, while at the same time these gains have translated into a decline in Pima and other extra-long staple varieties, and the traditional lower end of the market, generic upland cotton. So what had been the middle of the market has now become more important than ever in understanding the global cotton business.

Indeed, what are the ramifications of such changes? Will cotton become cheaper or more expensive? What about supply versus demand? Will there be shortages or new market opportunities?

To help answer these and other questions, FCStone Fibers & Textiles announces a new multi-client study entitled "The Future of High Quality and Branded Cotton".

With particular focus on China, India, the U.S. and Egypt, this study will examine global supply and demand trends for the major varieties of cotton, the attitudes of buyers and sellers of cotton internationally and the implications these trends and attitudes will have on merchants, mills, and retailers throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click here to download a copy of the study prospectus. If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

FCStone Fibers & Textiles Announces New Multi-client Study, "The Future of High Quality & Branded Cotton"

High quality and branded cotton acreage is on the decline around the world. In China, there is a major shift from extra long staple (ELS) to long staple (LS) cotton acreage underway in Xinjiang, the country's top cotton-producing province. In the U.S., Pima acreage is rapidly disappearing while Egypt is expecting a 50% reduction from last year's output. Ultimately, the rise of long staple cotton is supplanting high quality and branded grades, the ramifications of which will have a major impact on how merchants, mills, and retailers trade, purchase, consume, market, and brand high-quality cotton as a fiber and end-product.

FCStone Fibers and Textiles (formerly Globecot, Inc.) proposes to undertake a strategic study of the key countries producing long staple (LS) and extra long staple (ELS) cotton with a primary focus on China, India, the U.S. and Egypt. If you would like more information about this study, download the project prospectus. If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).