Weekly Commodity Market Recap: Cotton

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The ‘ascent’ portion of cotton’s roller-coaster ride continued last week, with a weak dollar and global supply concerns driving the market higher. While trading on the ICE Futures U.S. was constrained to an inside weekly range, nearby December prices still jumped 984 points from last week’s finish to 119.71 cents/lb by Friday afternoon, the highest weekly close in 140 years. This latest advance marks the thirteenth higher weekly close in the last sixteen weeks. Not since another supply constraint—a northern blockade of southern commerce during the American Civil War in the 1860s—have cotton prices been as high.

Issues driving the market last week primarily came from developments in China and the U.S., together accounting for about two-fifths of global cotton production. In China, an unexpected bump in interest rates—the first since 2007—sent traders scrambling. The action could hinder textile exports from the world’s largest textile producer and help curb excessive speculation in some markets. While this bearish news normally would be likely to exert some pressure on domestic prices, fundamental support remains intact and local cotton prices are still on the rise. On balance, late-week declines in the dollar overshadowed its Tuesday rebound from the interest rate move, pulling the greenback even lower and boosting prices for a range of commodities—including cotton—even higher.

Across China, new weather concerns discussed here are dimming producers’ sentiment for yield, production, and quality across much of the country. Parts of Anhui, Shaanxi, and Xinjiang reported either cooler or wetter conditions over the last week, unwelcome news for the world’s largest cotton producer. What’s more, this weekend a new northern cold front plowed south across unpicked cotton in China, bringing more strong winds, colder temperatures, and unwelcome rains to much of China. The country’s main meteorological agency is calling for temperatures to plunge 14-16 °C shortly in Hebei, Shandong, and Jiangsu, slowing harvesting and hurting fiber quality. Already, key forecasting organizations are paring back their projections—again—for the size of this year’s China harvest.

By Friday, the market soared limit up on news of heavy overnight rain and hail across the Texas High Plains discussed here. Almost four inches of rain Thursday evening pounded fields full of beautiful pre-sold cotton, suggesting yield losses and discoloration may be in the offing for the local crop. With bolls open on virtually all the state’s cotton but the Texas harvest only one-quarter complete, the timing could not have been worse. While damage estimates are premature right now, early guesses figure 50,000 to 100,000 bales may have been lost.

The same old approach for spinning mills of buying on-call and hoping for a pullback is going wrong in the worst of ways. Conditioned by years of oversupply, temporary price spikes, and virtually no risk management, spinners outside China have been caught unprepared for the great bull market of 2010 as the balance sheet continues to tighten. While there is grumbling in the mill community about idling spindles rather than running such expensive cotton, there still is scant evidence that demand is ebbing. After the market recovered so quickly from last week’s sell-off, we see little to stop it from making new highs in the coming week. To learn more about how we can help you better manage this exposure with a comprehensive risk management strategy to protect against the market’s peaks and swoons, please click here.

Weekly Commodity Market Recap: Cotton

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In anticipation of the USDA’s next release in coming days of the latest U.S. cotton supply and demand projections for new-crop cotton, FCStone prepared forecasts and commentary on how these projections may change from recent months:

U.S. production for 2010-2011: Down 300,000 bales to 18.5 million bales. While yields are still likely to be well above last year, crop conditions generally have eased gradually over the last two months across much of the cotton belt, suggesting yields may not be as robust as earlier anticipated. While this trend is happening in several states, we are keeping a close eye on Texas and the Carolinas. Here, the northeastern corner of the cotton belt received well over eight inches of rain last week, drenching open-boll cotton and fading harvest prospects. Also, the condition of the Texas crop still in the field has eroded to the lowest since June, dimming earlier optimism somewhat.

U.S. Exports: Up for the fourth straight month, rising from 15.5 million to 15.7 million bales. Already, early-season commitments stand at a record 8.9 million running bales, hinting at robust exports later this marketing year. Adverse pre-harvest weather in several cotton-growing areas of China was unwelcome and may hinder production and quality, suggesting the world’s largest importer may need to import even more fiber in 2010/11, with much of that coming from the U.S. What’s more, delayed exports from India discussed here also could bode well for shippers in the U.S. and Australia this marketing year.

U.S. Ending Stocks: With a likely smaller anticipated supply and projected demand bigger from last month, ending stock forecasts for October are likely lower by 500,000 bales from September to 2.2 million bales, the lowest level in more than five decades. Unsurprisingly, recent daily closes on The ICE here touched the highest levels in years in response. We look for the USDA to find expectations of higher demand and lower ending stocks will tighten the anticipated stocks-to-use ratio this year to closer to 14%. This would be the tightest ratio since 1994/95—the last time average prices were as high—and supportive of elevated prices well into the winter.

In spite of this increasingly tighter outlook for U.S. cotton fundamentals, we caution that any increase in U.S. prices may not be commensurate with the tightening in the balance sheet, as it has been over recent months. As the graph below demonstrates, the jump in futures prices has outpaced the tightening in the stocks-to-use ratio over the last two months. And October’s anticipated 12% ratio—while tighter than any point in years—still is not tight enough to support average September prices, let alone even higher prices in October. This extrapolation brings with it the pitfalls inherent in any extrapolation; we caution that October prices even could slide modestly lower, despite the tighter outlook for the domestic market.

While the anticipated tighter evolution of domestic fundamentals is impressive, we temper this outlook with a forecast for looser global balance sheet. In particular, we look for the Indian harvest to jump to a record size, on the strength of unprecedented yields. That having been said, it may be a few months before Indian policymakers allow new-crop shipments to resume, suggesting global exports—and world prices—may remain dear through the conclusion of harvest.

Weekly Commodity Market Recap: Cotton

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The bulls extended their run on the market last week, with support from anticipated tighter fundamentals in several key countries firming the outlook. The most-traded December 2010 contract on the ICE Futures U.S. rose for the seventh time in the last eight weeks, closing Friday at 91.29 cents per pound, the highest in more than two years. Even more impressive, earlier in the week the nearby October contract closed as high as 91.32, a fifteen-year high. Perhaps more significantly, the fact that each of the next ten cotton futures contracts are backwardated all the way until December 2012 shows just how tight world stocks have become, with little relief likely until well into the new marketing year, at the earliest.

The latest USDA WASDE report released Friday morning re-confirmed this tightness in the market. In spite of a bigger harvest forecast, gains in demand projections easily outpaced higher revisions to supply, implying lower stock levels. In fact, expected exports for this marketing year jumped 500,000 bales to 15.5 million, the second-highest volume in history. As a result, the USDA pared back 2010/11 U.S. ending stocks to a scant 2.7 million bales, the lowest level in fifteen years, closely mirroring our forecast here. In turn, expanding demand and lower inventories drove September’s forecasted stocks-to-use ratio lower to just 14.1%, the lowest since the mid-1990s, concurring with the highest domestic prices since the mid-1990s.

While not as dramatic, the net result of changes in the global balance sheet echoes the tighter conditions seen in the U.S., driving world cotton prices even higher. Forecasted ending stocks for this marketing year eased lower from August to just 45.4 million bales, also tightening the projected stocks-to-use ratio to the lowest in fifteen years. Naturally, global cotton prices are up again on the outlook. Already, every forward contract on China’s Zhengzhou Commodity Exchange now stands at a life-of-contract high, and the most-distant July 2011 contract settled Monday at 19,200 yuan/ton ($1.29), a record. Similarly, the ‘A’ Index, a proxy for global cotton prices, breached $1.00 per pound Monday for the first time since 1995, trending in mirror-opposite fashion to the plunge in global fundamentals.

Looking ahead, two opposing issues cloud the medium-term forecast. First, spinners worldwide are complaining that climbing yarn prices have not been commensurate with rocketing cotton costs. Naturally, this implies even tighter margins for many yarn mills that have little margin to spare. In fact, anecdotal reports are emerging of some yarn operations idling spindles and selling their cotton inventories to capitalize on the jump in price, something unsustainable longer-term. But arguing for the bulls, excessive recent rains in key areas of China and India could dampen prospects for yield, quality, or at least timeliness of the pending harvest. While the trend remains our friend, a global textile supply chain already dealing with razor-thin margins will be in no mood to support elevated fiber costs in the long term. Nearer term, while the fundamentals do not support a sustained retracement, we would not be surprised to see prices begin to plateau as the northern hemisphere harvest commences.

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 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

After climbing five of the last seven weeks to the highest level in fourteen months, nearby cotton prices stayed range-bound last week within the limits set last Monday as traders wrestled with an outlook for both lower supply and demand. After dropping 174 points last Monday from the prior week’s close, futures prices spent the week within a 250-point range as harvest concerns in several markets weighed against news of lower demand for U.S. cotton. Too much rain in Mid-South states here continues to plague production prospects in the region, delaying harvesting to the latest in history. With each passing day, the outlook for cotton yield and quality are eroding in the region. While low temperatures have remained above freezing in most of the south, prospects for the crop will dim rapidly once wintry conditions set in.

Similarly, inclement harvest weather in China is calling into question earlier optimistic forecasts for the crop size. In China’s Xinjiang province, freezing temperatures and the first snowfall of the season here are accelerating picking before harsher conditions set in. Also recently the China Cotton Association drastically reduced its anticipated harvest size by 2.5 million bales from the previous month’s forecast to 30.8 million bales, with Xinjiang production down 14-15% from last year, leading the decline.

Demand issues also weighed on the market, helping temper the streak of bullishness over recent weeks. U.S. mill consumption in September fell to a record-low 2.9 million annualized bales here, well below the latest USDA forecast for 2009/10 of 3.4 million bales. And weekly export sales and shipments fell to a marketing year low for the week ending October 15, suggesting cumulative shipments in 2009/10 remain behind the pace necessary to reach the latest forecast.

News of lower supply and demand last week worked to offset one another, leaving prices to trade within Monday’s range all week. By Friday, futures closed 83 points lower from the week before at 67.38 cents per pound. The weekly Spec/Hedge report showed that the spec long position grew to 18.5%, up 4.1 percentage points from the previous week. As the spec long position grows, so has open interest in cotton futures. By the close of business Thursday, open interest had risen to 180,635 contracts, strongly suggesting money is flowing into the cotton market.

Looking ahead, data on home sales, consumer spending, and a first look at third-quarter GDP will set the tone for economic releases for the week. After seeing the dollar plunge to a fourteen-month low last week, these data coupled with new retail sales data and an interest rate decision in Japan are sure to sway the greenback in coming days, with most commodities—including cotton—sure to respond in kind.