INTL-FCStone International Agricultural & Economic Forum April 25 – 27

This international forum will explore intermediate and long-term insight into the economic, energy, maritime freight, foreign exchange markets, weather and agricultural products, with global and regional focus for those seeking insight into strategic decision making. Click here to view the agenda and a list of speakers or to register.

A Peek Behind the Curtain at USDA Balance Sheet Forecasts for Cotton 2012/13

For an early, unofficial peek @ USDA's 2012/13 cotton balance sheets for US, China, & world, please see http://goo.gl/z2APj. USDA cotton economists echoed USDA Chief Economist Joe Glauber yesterday, saying A-Index is expected to average between $.80-$1.00/pound in 2012/13. Good stuff starts after pg 10. Enjoy!

FCStone Annual Outlook Conference: June 15-16, 2011

The 2011 INTL FCStone Outlook Conference focuses on examining supply and demand factors in uencing every major food-related commodity, as well as price in uencers such as interest rates, energy, currencies, governmental legislation and regulations, and global weather patterns.

This year's theme is "The Most Important Subject on Earth," an acknowledgment of the critical importance of food, at a time when political and economic disruptions, rising energy prices and controversial new technologies are bringing food supply and demand issues to the forefront of
the global agenda.

The continuing turmoil in the Middle East — exacerbated at least in part, according to many commentators, by food shortages and rising food prices in the region — will be addressed by the conference's keynote speaker, Shahar Arieli, Deputy Consul General of Israel to the Midwest.
His keynote address will help conference attendees understand what's happening in the region, and how various scenarios are likely to a ect food and energy prices in the months and years ahead.

Representatives from major U.S. and European exchanges will discuss new developments in global risk management tools. The influential market analyst David Hightower, publisher of The Hightower Report, will present his global financial outlook. Hightower, who has been a market analyst for more than a quarter century, is a frequent guest on CNN and Bloomberg TV. David Oppedahl, an economist for the Federal Reserve Bank of Chicago, also will offer a macroeconomic perspective on the U.S. and global economies.

For the full agenda or to register to attend, click here for more: http://www.intlfcstone.com/seminars/outlook/Pages/default.aspx

Weekly Commodity Market Recap: Cotton

for more analysis like this, please click here.

Last week cotton enjoyed one of its best performances in months, as nearby prices rose to a five-week high on heightened concerns of diminishing near-term supplies and in response to a weaker dollar. In fact, every contract month closed up for the week on an improving technical and fundamental outlook, reaching multi-week highs. The October contract finished the week—and the marketing year—at 82.36 cents per pound, a 22-month high. December similarly fared well, closing higher seven of the last eight sessions before settling at 78.76 Friday afternoon, its highest daily finish in over a month.

First, the sinking value of the dollar is helping prop up a broad range of commodities, including cotton. After reaching a near-term high earlier in June, the U.S. Dollar Index—a measure of the value of the greenback relative to a basket of foreign currencies—gradually eroded, falling to 81.655 late last week, the lowest in over three months. The dollar tumbled to a new year-to-date low versus its Japanese cousin, and teeters on the verge of falling to the lowest level against the yen in fifteen years. And at 1.305, the dollar also is trading near a two and a half month low against the euro, as signs of a relatively faster rebound in Europe take hold. Should the dollar remain depressed, this is likely to support a host of commodity prices later this summer, including cotton.

Second, Traders are fretting over the very real possibility that few old-crop supplies will be available for near-term shipment before ample new-crop supplies enter the market in a few months. Certificated stocks withered further, easing to just 47,365 bales by the end of the marketing year last week, the lowest since 2004. Any late-harvested U.S. cotton is not eligible for delivery in December—one of the two most traded contracts—creating ample fear that cotton supplies available for December delivery will be extremely limited. Thus, merchants are loath to hedge against December unless they can deliver. As a result, the lingering backwardation between the October and December contracts caused by views on old-crop/new-crop supplies has spilled over into the December/July spread. While the relatively modest Dec/July inversion is not—yet—a harbinger of bearish days ahead in its own right, it may bear attention if the inversion persists and widens appreciably as December approaches expiration.

Weekly Commodity Market Recap: Cotton

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After beginning last week on a sour note, cotton futures on the ICE Futures U.S. rallied impressively in the second half of the week to finish at the highest close in over a month on sentiment of fading near-term supplies. The market sank Monday and Tuesday as traders took their cues from the weather and from a bearish shift in the latest spec/hedge report. Futures retreated a combined 218 points over these two days, with the most-traded December contract briefly touching 72.96 cents per pound during Tuesday trading, the lowest level in almost five months.

Near-ideal weather across West Texas weighed heavily on the market early in the week. Speculation is mounting that if weather remains favorable, cotton yields and production could expand much higher this season than originally thought. Anecdotally, many Texas producers report the best-looking crop in years. In its latest report on the shape of the Texas crop, the National Agricultural Statistics Service reported 74% of the state’s cotton was in good or excellent condition, the highest share for this same week in more than a quarter century of recordkeeping. What’s more, this share is up three percentage points from the previous week and eighteen points from just three weeks ago, suggesting that crop conditions—and prospects for higher yields—continue to improve with each passing week in the nation’s largest cotton-producing state.

Early in the week the latest spec/hedge report from the ICE exchange added to the bearish view. The report confirmed specs had turned net short for the first time in thirteen months, weighing further on the market. Specs are now net short 2.3% versus 1.9% net long the previous week. The net spec short position is 3,724 or 2.3% of total open interest, the most in seventeen months. After trending closely with the December contract for about a year and a half, the gradual erosion in net longs over the last two months confirms specs are increasingly disillusioned with the long side of the market, helping drag December lower.



But by Wednesday, market sentiment had turned more bullish, as traders turned their attention to the plummeting volume of certificated stocks still on hand in the U.S. By the end of the week, the volume of cert stocks deliverable against ICE futures contracts had fallen to 55,389 bales, the lowest in five and a half years. From a seasonal peak of 1.08 million hardly a month and a half ago, stocks are down more than a million bales, introducing a bit of panic buying into the market by late in the week. Dwindling exchange stocks are making commercial traders increasingly anxious that new-crop supplies may not replenish the current dearth of supplies by the time they need to take delivery, prompting the buying. From Tuesday’s low, December rebounded the next three days, rising a combined 233 points to 75.34 cents, the highest close in three weeks.

Looking ahead, the diverging trends between a net short spec/hedge report and dangerously low cert stocks are unlikely to be resolved soon, suggesting the market may see bigger-than-normal volatility in the near term. But longer term, once new-crop supplies begin to reach the market this fall, a rebound in certificated stocks to more normal levels may begin to weigh on the market. Should weather remain conducive for yields across much of West Texas, any renewed upswing in prices that began last week may prove difficult to sustain.

Weekly Commodity Market Recap: Cotton

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The most-traded December contract fell for the fourth straight week last week, finishing Friday at 73.96 cents per pound, the lowest weekly close in five months. In the U.S., weather typically is the biggest influence on cotton trading at this point in the year, and this season is no exception. The sentiment that a ‘big crop is getting bigger’ is commonly held across the Belt. Already, at 18.3 million bales, the latest forecasted harvest size from the USDA reflects a robust upswing in estimated cotton plantings from estimates just a few months ago and higher projections for yield. Even so, this higher target still may prove too low, given the increasingly optimistic view for the Texas crop here. While cotton across the southeastern U.S. struggled under near-record heat in June here, west Texas cotton received welcome showers that could be just what the crop there needs to rival record yields. The latest trend of daily prices for the October and December contracts reflects this view of a ‘big crop getting bigger’. Instead of the normal contango in the market, December presently is trading for 600 points less than October, suggesting the market expects a much-larger crop once the harvest is completed after the expiration of the October contract.


With roughly two-thirds of the global cotton crop grown in the northern hemisphere, summer weather is a driving force for cotton markets around the world at this point in the crop cycle. In China, home to the world’s largest cotton harvest, in spite of springtime planting delays, the crop is likely to surpass last year’s size, rising to roughly 33.0 million bales. In fact, the latest forecast from China’s National Cotton Market Monitoring System (NCMMS) here looks for a harvest 3.3% bigger than last year, concurring with USDA forecasts. And while the crop remains behind across much of the country, producers across China see development in recent days narrowing the gap, supporting the cautious optimism for yields and harvest size.

In India, where more land is planted to cotton than any other country, a lackluster monsoon has yet to crimp prospects for a record crop. While last week’s report from India’s Meteorology Department here suggests season-to-date rainfall is 13% below normal, no major damage has been reported to the crop yet. In fact, analysts believe that even if the monsoon remains similarly below normal for the rest of this season, the crop could still develop well, as long as rains are well distributed. So far this season, central and northeastern states remain relatively drier, while the southern half of the country has seen an abundance of showers. Should widespread showers pick up in coming weeks, Indian production could rise to a record 25.0 million bales on the strength of record plantings and higher yields, also helping to throttle back global prices in the new marketing year. But if the optimism begins to fade both in China from persistent crop delays and in India from uneven, scant monsoon rains, anticipated tight global stocks in the new marketing year could push average prices higher in 2010/11, no matter how big the west Texas crop may be.

Weekly Commodity Market Recap: Cotton

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After shedding roughly 350 points during the previous two weeks, trading on the ICE exchange during the holiday-shortened week turned ugly, as the technical picture eroded further and bearish fundamental news justified the recent plunge. For the week, the most-traded December contract lost another 54 points, the third straight week of contraction. At just 74.99 cents, Friday’s finish marks the lowest weekly close for the contract since March. In fact, the weekly loss would have been more pronounced, had prices Friday not rebounded 100 points, partially offsetting lower closes seven of the last eight sessions.

After decaying over the last several days, the technical outlook for the market may be suggesting a shift into a near-term sideways channel for prices. First, Friday’s high completed a perfect retracement to the breaking of trend around 75.40. Major moving averages are still crossing down and should keep trend-system selling over the market. The 20-day moving average crossing down and under the 40-day moving average is not to be taken lightly, especially after being above the 40-day for the last four months. But we also point to the Relative Strength Index for signs the market may ease its losses, at least for now. After drifting between warning points of 30 and 70 over most of the last five months, the 14-day tracker for December on the RSI breached 30, hinting at oversold conditions in the market. Since it would only take a few days of consolidation for the RSI to rebound before the market could again head lower, we expect more sideways to higher price action in the next few days, followed by another move to new lows.

Fundamentally, the plunge in prices over recent weeks reflected market sentiment for a much larger U.S. crop. The USDA confirmed this sentiment with the release of its latest production forecast here, anticipating the domestic harvest will jump 1.7 million bales from last month’s forecast to 18.3 million bales, the biggest crop in three years. While we have long expected a likely jump in production this fall and witnessed weather conducive for yields across much of Texas here, this increase surpassed all estimates from a recent survey of analysts, justifying the recent slide in prices.

Regardless, demand continues to support the outlook for prices in the long term. While the production forecast in the July WASDE report jumped beyond expectations, global mill demand is still likely to outpace the world harvest size for the fifth straight year, resulting in the lowest ending stocks in years, albeit not as low as earlier anticipated. As a result, while prices may ease lower in coming months on the outlook for an even larger crop, they are likely to remain well above their long-term average, reinforcing the need for market participants to utilize a comprehensive risk management program. To discuss how FCStone Fibers & Textiles can help you with this critical issue, click here to contact FCStone's team of risk management consultants.

Weekly Commodity Market Recap: Cotton

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Cotton retreated further on the week, with nearby prices closing lower four of the last five trading days, finishing the week at 77.83 cents per pound, its lowest daily close in four weeks. The weakness came both from the supply and demand sides, attributable both to a bigger U.S. crop and to worries about the economic outlook in several key markets around the world, notably Europe, the U.S., and China. On the supply side, the market sank this week on learning of a bigger-than-expected plantings estimate from the USDA. The government’s acreage forecast here implies a bigger-than-expected domestic harvest this fall, given a bigger-than-expected increase in cotton plantings this spring. At 10.909 million acres, total cotton plantings are expected to be up 19.2% from last year’s 9.149 million acres, the biggest percent jump in fifteen years.

On the demand side, debt financing and credit concerns remain a drag on European markets, threatening to spread across the continent and afflict other countries around the globe. These concerns are weighing on consumer confidence in several European markets, sapping shoppers’ enthusiasm to spend. In particular, European sales of textiles, clothing, and footwear—widely viewed as discretionary, non-essential purchases—sank -0.4% in April from a year earlier, offsetting four straight months of gains. Naturally, slipping sales in this category bode poorly for global demand for cotton.

Also, the outlook for the U.S. economy dimmed in the last week, further weighing on prospects for global cotton demand. From consumer confidence to factory orders to payrolls, several indicators sank in recent days, suggesting at best a slower rebound in economic activity, and at worst an increased likelihood of a double-dip recession. After reporting three consecutive monthly increases in consumer confidence, the Conference Board reported a much steeper-than-expected drop in consumer confidence in June. The organization’s index of consumer confidence fell to 52.9 in June from a downwardly revised 62.7 in May. Adding to the negative tone, a barometer of business activity pointed to contraction in May. After reporting eight consecutive monthly increases in new orders for manufactured goods, the Commerce Department released a report Friday showing that factory orders fell much more than expected in May. Factory orders fell 1.4% in May, more than twice as big a drop as analysts were expecting. Finally, the week concluded with a thud on the release of the latest employment data. Non-farm payrolls fell by 125,000 jobs in June, the first drop in seven months. While most of the plunge was due to the steep drop in the number of temporary workers for the census, the loss still outpaced forecasts by market watchers. Given the weaker tone of recent economic news, it comes as little surprise that cotton prices—which are typically well-correlated to economic activity—plunged again last week.

Lastly, the news from China last week also cast a pall over the cotton market. Even though China’s National Bureau of Statistics revised 2009 GDP growth across the country to 9.1% from its earlier estimate of 8.7%, signals point to mounting concern that growth may slow this year. Growth in auto sales slowed in June as the government acted to tighten credit in order to control inflation and cool the economy. Similarly, the government is reigning in speculation in the housing market, in hopes of containing inflationary pressures, but is also inadvertently hindering employment in housing-related professions. Foreshadowing slower growth in the economy, the Shanghai composite index recently fell to a fifteen-month low. Should slower economic growth take root in this market, it could hinder prospects for rapid growth in retail demand for cotton products in one of the most promising growth markets in the world.

While we still point to the longer-term bullish fundamentals inherent in the market, the shorter-term technicals have eroded rapidly in recent days. Price is now just above major support in the form of the 200-day moving average and the bull trendline going back to the March 2009 lows. Short-term moving averages (nine- and ten-day averages) are crossing down and under the medium- and longer-term averages. Last week also saw December plunge through support at 50% and 61.8% retracement points, closing lower for six straight sessions. Friday’s close cast a negative light on the weekly chart, confirming the “toppy” price action of the previous two weeks. Looking ahead, prices this week will take their cue from Friday’s next WASDE report and sentiment behind a recently weaker dollar. Also, coming days promise to be critical to the technical outlook as the weekly December chart approaches long-term support in its sixteen-month up-trend channel.

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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Following the previous week’s surge, cotton prices on the ICE Futures U.S. exchange moderated last week, posting only modest gains during trading that saw the market grapple with news that pushed prices both higher and lower. At 81.78 cents per pound, nearby prices rose a modest 24 points for the week to the highest weekly close in a month. The market remains choppy, with daily closes for the Nearby range-bound in a 700-point channel over the last four months. For the week, dominant news that worked to pull the market higher was tighter anticipated fundamentals in China in the new marketing year, while an announcement of unrestricted exports from India partially offset this bullish sentiment.

First, an early peek at a Chinese balance sheet confirms the outlook for even tighter fundamentals in the new marketing year. Here, China’s National Cotton Market Monitoring System (NCMMS) is looking for domestic mill demand to outpace domestic supplies again in 2010/11, implying already-small ending stocks will shrink further by the end of the new marketing year, providing more fundamental evidence to support higher domestic prices. While the NCMMS looks for the Chinese harvest size to expand this autumn, it still looks for mill use to easily surpass the crop size for the twelfth straight year, implying China will have to import even more cotton in coming months. This could boost export prospects for several key foreign suppliers—particularly the U.S., India, and Brazil—and is likely to tighten global supplies, driving domestic and world prices higher. Already, average nearby prices on China’s ZCE so far in 2009/10 are up 2,908 yuan/ton (19.3 cents/lb) from the previous year and stand near a record high. If the 2010/11 ratio tightens as much as projected, this would be fundamentally friendly to even higher average domestic prices in the new marketing year.

Offsetting this sentiment somewhat, we reported here an announcement from India’s Ministry of Commerce of an apparent reversal of policy from just two months ago that now allows unregistered, duty-free cotton exports to all destinations. When restrictions were first imposed in April, U.S. prices closed limit-up and gapped even higher the next day on the assumption that U.S. supplies would fill the export void left from much of the absent Indian supplies. This determination essentially reverses these restrictions, with implementation due to take effect on October 1st, roughly when new-crop supplies begin to enter the market. While the market did not post a drop on the news similar to April’s jump, the outlook for higher Indian exports in 2010/11 could cast a bearish pall over the market in coming months.

On balance, we look for prices to remain elevated, if volatile, in coming months. A new policy shift to a weaker yuan, retreating certificated stocks, and an outlook for tight global fundamentals in the coming marketing year all point to this same view. The long-term concern is that higher—not to mention volatile—fiber costs and flat or easing prices for textile and apparel goods sold at retail imply tighter margins and increased risk exposure for those along the supply chain. Click here for a no-obligation conversation on how FCStone may be able to minimize this risk exposure for you.

Weekly Commodity Recap: Cotton

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After retreating for nine straight sessions, the cotton market came roaring back last week, with nearby prices staging a weekly reversal to the upside and closing higher for four straight days before finishing the week at 81.54 cents per pound, the highest weekly close since mid-May. For the week, the July contract gained 448 points, October rose 384 points, December tacked on 366 points, and March climbed 351 points. One key factor driving prices higher has been a pronounced contraction in certificated stocks. Since reaching the highest level in a year and a half in early June, cert stocks have fallen six of the last seven trading sessions, shrinking by more than a fourth since then. A surge of more than 624,000 bales in old-crop sales—mostly to China—confirmed where most of these decerts are going. And with May Chinese cotton imports jumping another 30.6% from last year to more than 900,000 bales, Chinese mills’ voracious appetite for foreign cotton remains evident. We look for more decerts and firmer prices into the July notice period, with the outlook leaning more bullish in coming weeks.

Longer term, crop prospects are improving in several markets, suggesting the autumn harvest in the northern hemisphere may be bigger than currently anticipated and could weigh on prices later this year. Many analysts—including FCStone—agree that timely plantings and favorable weather could boost the U.S. harvest well above the 16.7 million bales currently anticipated by the USDA. In particular, the overall West Texas crop is off to one of its best starts in years, hinting at a more optimistic yield outlook—and presumably a bigger cushion of exportable supplies—for the world’s largest cotton exporter.

Similarly, monsoon activity is accelerating and intensifying across much of India, helping advance cotton plantings. After getting off to a slower-than-normal start, the monsoon has advanced northward rapidly in recent days. Additionally, evidence here shows energy available to the monsoon is spiking well above average and indeed rains last week were well above model expectations. As a result, cotton and groundnuts are expected to see a steady and timely upturn in planting over the next week, boosting early optimism for the crop in a country that devotes more land to cotton than any other.

On balance, this view supports an outlook friendlier to the shorter-term bull, and perhaps less friendly to the longer-term bear. Global cotton supplies are likely to remain tight until new crop offers come on the market this fall. But even then, a larger world harvest still is likely to fall short of global mill demand for cotton for the fifth straight year, albeit not as much as this marketing year. Regardless, this forecast implies global ending stocks in the coming 2010/11 marketing year could fall to the lowest in years, driving the stocks-to-use ratio to the tightest since 1994/95, when world prices averaged over 90 cents per pound.

Weekly Commodity Market Recap: Cotton

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The cotton market continues to plumb new lows, weighed down by a soaring dollar, weaker equity markets, and the forward roll of positions by funds. Nearby cotton prices tumbled lower for the ninth straight session Friday, finishing the week at 77.06 cents per pound, the lowest daily close in almost four months. For the holiday-shortened week, Nearby prices gave up 299 points. Every contract month retreated last week, with several falling to the lowest levels in months. Different technical indicators are calling for a rebound, with momentum oscillators and the Relative Strength Index moving into oversold territory.

A key issue that continues to hinder prices in the broader commodity market is the relative strength of the dollar. The euro continues to get pounded on debt worries spreading across the continent. Europe's shared currency finished the week below $1.20 for the first time in four years, following bleak economic statements late in the week from Hungary. This drove U.S. Dollar Index futures to a fifteen-month high of 88.315, hammering commodity prices. Reflecting this weakness, the Reuters/CRB Index has collapsed over the last month, and at 248.94 is flirting with a new nine-month low. As a result, despite the most bullish old-crop fundamentals in years, cotton prices are pulled lower by weakness in commodity prices brought on by a re-strengthening dollar.

A second issue weighing on cotton prices is weakness in another key asset class, equities. Dow Jones Industrial Average futures finished the week below 10,000 for only the second time this year, dragging cotton prices lower. As the graph below shows, for the last year and a half, there has been a strong correlation between cotton prices and the Dow. But after weakening earlier this year, the co-movement has broken down during the last month, as stock prices retreated relatively faster in response to fears of a stalling global recovery.



A last issue that has hindered prices in recent days has been the roll forward of positions by funds. Long liquidation is accompanying this rolling of positions, reflected in the narrowing of the July/December inversion. After weighing on the market all year, this backwardation narrowed last week to just 165 points. The steep descent in nearby months has facilitated additional sales of certificated stocks as first notice day approaches for July. While the bears clearly have ruled trading in recent weeks, weather and its impact on crop development will dictate price with a more vocal voice for the market over the next several weeks.

Weekly Commodity Market Recap: Cotton

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Buffeted by less-than-favorable headwinds from outside markets, cotton prices were little changed on the week but still managed to fare better than most commodities, hinting at the underlying strong fundamentals internal to the cotton market that are likely to persist into the coming marketing year. Nearby cotton futures finished the week up a modest one point to 80.72 cents per pound from the week before, trading inside the prior week’s range. But this seemingly dull activity masks the impressive behind-the-scenes narrowing of the spread between July and December. After reaching a difference of 895 points hardly three weeks ago, the backwardation between these contracts stands at just 345 points now, as prices on both contracts have converged.

Cotton has taken its cues recently from both internal and external influences, particularly the re-strengthening of the dollar and the outlook for cotton fundamentals in the new marketing year. Naturally, many markets around the world are hanging on the latest developments emanating from the European debt crisis. The difficulties impacting Greece threaten to drag other euro-bloc members into the morass, weighing on investor and consumer confidence and lowering the value of the area’s currency. As a result, the euro fell to its lowest level in more than four years, helping push its American cousin higher. At 86.231, the U.S. Dollar Index rose to its highest level in a year, crimping prices for a number of dollar-denominated commodities traded globally. Oil prices retreated to a fourteen-week low of $71.61 per barrel, while the Reuters/CRB Index collapsed to 258.55, matching its lowest level in seven months. By comparison, cotton managed to fare relatively well in this environment against a broad mix of commodities.

A reason behind this relatively better performance from cotton may be due to the latest USDA WASDE report, which provides a first peek into projected market fundamentals for the new marketing year. The USDA looks for global cotton production to rebound an impressive 10.7% in 2010/11, but still trail the volume of global cotton mill demand for the fifth straight year. World cotton use is likely to expand to more than 119 million bales, the third-highest volume on record. As a result, the USDA anticipates global ending stocks will decline even further in 2010/11, tightening the world stocks-to-use ratio to the lowest level since 1994/95, a year when prices soared to more than a dollar per pound. While these tighter fundamentals are not enough evidence to conclude prices will climb even further in the coming marketing year, they do strongly imply that the market is unlikely to see prices settle closer to their ten-year average of just 55 cents per pound. While our short-term bias may be lower, tightness in cotton and yarn markets is acute in many markets around the world, supporting our long-term bullish slant that cotton prices are unlikely to retreat dramatically in coming months.

Weekly Commodity Market Recap: Cotton

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Cotton futures retreated for the second straight week last week, erasing all of April’s gains as outside influences drove the dollar higher, roiled equity markets, and pressured most commodities lower. Nearby cotton prices fell 342 points, or -4.1% on the week to 80.71 cents per pound, burdened primarily by a soaring dollar. Last week’s strength in the greenback is a bit of a misnomer, with the true issue being relatively more weakness in the euro from default fears emanating from Greece. The euro plunged to as low as $1.26 last week—a fourteen-month low—amid concern that Greece’s debt issues could lead to a much-worse contagion across Europe, crippling the tentative recovery on the continent. Naturally, this propelled the dollar higher, with the U.S. Dollar Index breaching 85.0, its highest level in over a year. Naturally, the dollar’s rise caused massive unwinding of long commodity trades, including cotton.

These jitters spilled over into equity markets, sending stocks on a wild roller coaster week of trading with commodity markets paying close heed. The Dow Jones Industrial Average shed almost 800 points on the week—its biggest plunge in years—as investors unloaded risk amid this week's chaotic experience in the markets. Euro-zone debt issues coupled with Thursday’s unprecedented—if ‘accidental’—intraday U.S. stock market plunge of almost 1,000 points left investors in no mood for additional risk exposure in equities or commodities, with many flocking to the relatively safe havens of gold and the dollar.

This ‘flight to safety’ drove prices for many commodities lower, dragging cotton prices down in step. The nineteen-commodity Reuters/Jefferies CRB index plunged nearly 6%, the biggest weekly fall since 2008. All major components of the Index except livestock posted steep losses on the week, reflecting the broad-based risk aversion. Regardless of any internal fundamental drivers impacting the cotton market last week, cotton was swept up in the broader-market decline.

Looking ahead, the coming week holds the potential for a rebound for cotton. The market’s first peek at new-crop fundamentals from the USDA Tuesday is likely to suggest continued tightness in the balance sheet, if somewhat looser than this marketing year. Analysts’ forecasts—including our own here—point to a larger crop size in 2010/11, but an offsetting jump in demand for U.S. cotton as well. Also, anecdotal evidence indicates that last week’s swoon in prices prompted Chinese mills to become active buyers, suggesting robust export sales are forthcoming. And the weekend announcement of a Greek rescue package worth almost $1 trillion from the EU is likely to assuage fears of an imminent default, lifting spirits and easing risk aversion somewhat. This news could partially offset last week’s decline in the euro and prompt a modest rebound in commodities in coming days, including cotton.

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.

Weekly Commodity Market Recap: Cotton

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The ebb and flow of the cotton market turned decidedly in the direction of the bulls last week, with several indicators helping prices advance. Cotton broke out of its horizontal trading range established over the last two months, primarily driven higher by a surprise announcement here that India would suspend registrations and exports of cotton for the time being, effective immediately. Responding to the steep increase in local cotton prices, India’s Office of the Textile Commissioner took this unusual move in order to boost domestic supplies and presumably temper the recent gains in local prices. Ironically, this action is likely to deplete already-short stocks of exportable supplies in the rest of the world, driving global prices higher. In response, Nearby prices on the ICE Futures U.S. exchange gapped higher on the news, surging 619 points on the week to close Friday at 86.20 cents per pound, the highest weekly close in fourteen years. Similarly, the Cotlook ‘A’ Index, a proxy for global prices, soared in step to 91.30 last week, the highest level also since the mid-1990s, reflecting higher prices worldwide for cotton.

Also bullish for price was news of a spurt in weekly exports of U.S. cotton here. Shipments climbed past 350,000 bales for the first time this marketing year, reflecting strong growth to a number of key markets. In particular, cotton destined for Chinese and Bangladeshi mills rose to the highest volume so far this marketing year. With rumors circulating that China is set to increase its tariff rate quota again soon coupled with news that India likely will not be nearly as large a competitor in coming weeks, U.S. cotton stands a strong chance of surging to China in the remainder of this marketing year. Also, forecasts for record mill demand and imports of cotton in Bangladesh suggest U.S. cotton may fare well this year as well. On balance, we look for U.S. cotton exports to follow their normal seasonal trend of accelerating in the remaining weeks of the marketing year, with mounting evidence suggesting shipments in 2009/10 could exceed the latest USDA forecast of 12.0 million bales as we first suggested here.

Although market fundamentals point to higher cotton prices, last week’s spurt may have driven the market into overbought territory—especially if the credit situation in Greece causes speculators to lighten up on risk. In the past four decades, there have only been five price moves above 90 cents per pound, and as cotton prices begin to approach this psychologically important level, the market may find willing sellers, as weak longs and commercial traders try to lock-in relatively high historic prices. The most recent Commitment of Traders report shows commercial traders increasing their net-short cotton position by nearly 11,500 contracts as of April 13th. This was before India’s announced export ban, as well as before prices moved above the consolidation range established over the last two months. Next week’s report will be interesting to see if commercials continued to sell into the rally, or if speculative accounts, mainly trend-following funds, were adding to their long positions on the chart breakout. One thing that appears evident is that cotton traders should have an interesting trading environment well into 2010, and that risk exposure for both producers and consumers is likely to be more pronounced than in recent memory.

Weekly Commodity Market Recap: Cotton

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As both supply and demand signals both grew louder in recent days, nearby cotton prices last week remained firmly rooted within their trading range established over the last two months, with neither longs nor shorts eager to commit to either direction. On the supply side, production prospects continue to improve in several markets. The Australian harvest is advancing under near-ideal weather conditions here, suggesting yields and crop size may be somewhat larger than current USDA forecasts indicate. In the Northern Hemisphere, hotter-than-normal springtime temperatures across much of India detailed here hint at a wetter-than-normal monsoon, boosting early projections for yields for several crops, including cotton. And in the U.S., adequate subsoil moisture levels combined with dry weather across much of the Cotton Belt here are allowing producers to commence plantings with a fair bit of optimism for the new crop. Each of these supply-side indicators turned more sanguine for yields in recent days, adding to the bears’ argument for lower prices.

At the same time, demand signals continue to firm in several markets as the global economy recovers and re-accelerates, reinforcing the bulls’ position for continued gains in prices. Chinese cotton imports discussed here tripled their year-ago volume in March, climbing to the highest volume in almost four years. Rampant speculation persists that China will issue additional import quota again soon to ease an expected supply shortfall. If so, this would likely propel futures prices higher, as the U.S. remains the residual supplier on the world market. Here, Turkish purchases of U.S. cotton rose to the highest February in several years two months ago, trending higher with improving mill demand in Turkey and accelerating season-to-date growth for the second-largest market for U.S. cotton exports. Even U.S. mills are enjoying new-found exuberant business, with March year-over-year textile output here climbing at the fastest pace since 1987, boding well for cotton consumption prospects.

The juxtaposition of louder arguments from both the bulls and bears leaves cotton prices mired in their same trading range witnessed since mid-February. At 80.01, the Nearby contract rose 1.94 cents on the week, oscillating lower then higher for the sixth straight week. Even the technicals appear indecisive right now. Momentum oscillators and moving averages are providing little clue to the direction of general momentum. Long-term moving averages are still trending higher, while short-term moving averages are moving sideways along with price. The crossing of the ten-day and forty-day moving averages is a bit bearish, but only slightly so considering the forty- and fifty-day averages are still in a solid uptrend.

Outside indicators ranging from the fallout from Goldman Sachs to the euro presently are somewhat bearish for cotton, but we take notice of China’s looming impact from higher tariff rate quotas. Greek debt issues and the impact on Europe from the Icelandic eruption are sinking the euro and boosting the dollar, pressuring commodities lower. But should Chinese imports surge even more in coming months, this could trump most other near-term drivers on the market. We find little reason to commit to either direction so long as the market stays range-bound, although we continue our longer-term bias to an upside breakout over a move lower out of the recent trading range.

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.