One-Day Cotton Hedging Workshop, April 24

Join us in Bangkok for an all-day seminar focused on minimizing cotton risk by implementing a regimented hedge program. Explore different hedge tools available that can add significantly to current procurement and/or sales strategies and explore how a well-managed hedge program can work, especially in a challenging environment like last season. Click here to view the program and details of the session and click to here register before the session fills.

Weekly Commodity Market Recap: Cotton

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

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

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

Weekly Commodity Market Recap: Cotton

ICE cotton futures finished Friday with another close lower, but still managed to rise for the week following Monday’s surprise limit-up move. Friday’s 76-point tumble in the Nearby capped four straight days of erosion in the May contract, but the combined 343-point loss over this period still did not fully offset Monday’s surprise 400-point surge. The curious turn in market prices shadowed a curious turn in breaking news last week. The big developments for the week that impacted the market were Indian policymakers vacillating over cotton exports followed by a generally bearish WASDE forecast for the U.S. and world cotton balance sheets.

First, early last week India announced an immediate export ban on cotton, whether or not the bales already had been registered for shipment. Apparently, the world’s second-largest cotton exporter has shipped substantially more cotton abroad than first anticipated, leading local the textile industry to worry that sufficient domestic cotton soon would be in short supply. In an ironic twist, large exporters are rumored to have shipped substantial volumes of local cotton to foreign warehouses in anticipation of the very export ban government officials say the shippers caused. The decision appears to have been made unilaterally without conferring with all domestic stakeholders, including India’s own Agriculture Minister. Understandably, the news threw markets into disarray and prompted howls of criticism, with local prices plunging while global and U.S. cotton prices rocketed ahead to start the week

But later in the week, the March WASDE provided its own fireworks, with surprise bearish adjustments to the balance sheets for both the U.S. and the globe. On the domestic front, despite strong evidence pointing to lower U.S. cotton exports, the USDA left this projection unchanged at a lofty 11.0 million bales. Instead, the USDA pared back its domestic cotton consumption forecast by 100,000 bales to just 3.4 million bales, the lowest in more than six decades. Worldwide, anticipated ending stocks jumped 1.55 million bales from February to 62.3 million, within a whisker of the record set five years ago. This adjustment eased the projected global stocks-to-use ratio to its loosest in a decade, weighing on price prospects later this year.

Lastly, the market was sent into another bout of disarray as Indian policymakers decided to move the goalposts again, not just once, but three times since Friday. First, prior to a meeting of cabinet ministers Friday to review the recent export ban, the Director General of Foreign Trade announced that cotton that had already cleared Indian customs by March 4th could be exported. Then Sunday Trade Minister Anand Sharma said the government had decided to fully roll back the ban, an apparent about-face from less than a week ago. However, Monday Trade Secretary Rahul Khullar announced the government won't accept new export registrations until it completes a review of recent exports and applications. This wavering indecision continues to roil markets and does little to boost the already-damaged reputation of India as a reliable cotton shipper.

Combined, the streak of declines Tuesday through Friday coupled with today’s intraday losses more than offsets last Monday’s limit-up jump on the ICE, suggesting the bears continue to maintain the upper hand over recent weeks. Since approaching medium-term resistance near $1.00/pound in mid-January, futures gradually eased lower, shedding roughly thirteen cents and presently stand near their lowest levels so far this year. If projected fundamentals for this marketing year continue to erode as we expect and there are no more policy surprises, the cotton market may be poised to ease lower as spring plantings approach and attention turns to weather developments for the new crop.

Weekly Commodity Market Recap: Cotton

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

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

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

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

Weekly Commodity Market Recap: Cotton

Domestic and global cotton prices trickled lower last week, burdened by weighty prospects for weaker cotton textile output in India and expectations of bulging global inventories of the fiber by the end of the next marketing year. At 87.48 cents per pound, ICE cotton futures Thursday touched their lowest so far this year before rebounding modestly Friday. Prices across every contract month retreated for the week, with several touching their lowest weekly settles so far this year. Foreign growths also joined the slide, with the ‘A’ Index tumbling 120 points Friday to a seven-week low of 98.15 cents. In China ZCE cotton futures sank across all contract months again Friday, with several reaching the lowest settles in more than six weeks. Total open interest expanded for the fifth straight session, stretching to a five-month high. The hemorrhaging also continues unabated for a range of Indian spot quotes, down sharply last week to the lowest levels this year. The widespread—if relatively modest—erosion in prices around the world last week reflects mounting bearish evidence hinting at looser balance sheets, both this marketing year and next.

Two key fundamental drivers impacting the market last week were from India and the USDA. First, early in the week came news that Indian cotton yarn production sank again in December, down -16.1% from a year earlier, the eighth straight month of double-digit year-over-year losses. This disappointing contraction in output confirmed 2011 as the worst year in at least a decade for the local cotton spinning sector. What’s more, the plunge reinforces our earlier view that cotton consumption forecasts by the USDA and India’s Cotton Advisory Board remain too generous. If these projections are whittled lower in coming months, Indian and global balance sheets for the current marketing year are likely to loosen, pointing to softer prices ahead.

The second key news for the week came from the USDA’s annual Agricultural Outlook Forum held near Washington, DC late last week. While unofficial, a tentative new-crop global balance sheet presented by USDA economists indicated world cotton production was likely to outpace mill demand for the third straight year in 2012/13. If so, ending stocks by the conclusion of the next marketing year are likely to rise, perhaps to a record 64.8 million bales. If this projected balance sheet comes to fruition, it will denote the loosest global fundamentals in eleven years, implying softer prices may lie ahead in 2012/13. Indeed, in a speech at the Forum, USDA Chief Economist Joseph Glauber expects crop prices to fall in the new marketing year, with cotton averaging 80 cents per pound. With futures presently closer to 90 cents and ‘A’ Index quotes even higher, last week’s erosion in price may be only a modest, early slip in a more protracted tumble to much lower prices later in 2012.

Weekly Commodity Market Recap: Cotton

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Futures trading in New York firmed again last week, driving nearby prices to the highest levels in more than fifteen years as near-term supply concerns around the globe remain a dominant issue. At 99.93 cents per pound, Friday’s finish closed out the tenth weekly increase in the last twelve weeks. In fact, earlier in the week futures gapped as high as 103.55 cents before retreating lower to finish the week up 232 points. Backwardation remains endemic in every contract through 2012. The most-active December contract is up an astounding 26 cents—or more than 36%—in just two months, reflecting both a weaker dollar and concern over shorter crops and tight supplies in a number of markets.

First, the dollar continues to sink lower, boosting export-dependent commodity prices. Dollar Index futures tumbled for the fourth time in five weeks last week, crashing through support to 79.599 Friday, the lowest close in six months. Loose, accommodative monetary policies reinforced by Federal Reserve comments again last week are sure to keep the greenback under pressure for the foreseeable future, suggesting firmer cotton prices may rule for some time.

Next, crop prospects in key markets remain tilted in a more pessimistic—rather than optimistic—direction, further supporting the bulls’ position. The latest cotton assessment in the U.S. shows crop conditions are eroding from early this summer, suggesting yield prospects may fade in tandem as we suggested here. In particular, the USDA recently declared topsoil has turned “short or very short” of moisture over a large percentage of the South. Coupled with unwelcome weekend rains over open-boll cotton in much of the area, prospects for yield and quality could dim further, supportive of price.

China’s crop also remains a concern, plagued by late plantings this spring and heavy rains this fall that are delaying the harvest. Evidence here shows every key cotton-growing region in the North China Plain is seeing cumulative precipitation this season much heavier than normal. What’s more, many of these showers have fallen in recent days, when the crop needs dry days and cool nights to reach full potential. Instead, picking is delayed and the crop in the world’s largest producer could be compromised. In response, over the weekend China announced plans to expand its reserve auction by another 400,000 metric tons to 1.0 million tons, in order to ease near-term supplies for local mills. This move did little to ease panic buying, with every ZCE futures contract month surging to life-of-contract highs.

In light of these bullish indicators, the question remains how much of this sentiment is already factored into the market. While calling a top in a runaway bull market like this is a fool’s game, we take caution that any continued tightening in the fundamentals mostly may be priced into the market already. Futures may have further to climb this fall, but we remain wary of the volatility and look for any continued tightening in the fundamentals to have a more muted impact on driving prices higher.

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 cotton market enjoyed universal gains in forward markets last week, spurred on by the latest USDA report deemed particularly friendly to the market, but overbought technicals will make continued gains more difficult in coming days. Nearby cotton futures posted their best week since early June, soaring 309 points on the week to finish Friday at 87.49 cents per pound, the highest close in 29 months. The most-traded December contract rose for the fifteenth time in the last eighteen sessions to close Friday at 84.18, the highest in more than ten months.

A decidedly bullish WASDE report from the USDA was a key driver supporting the continued strengthening in prices. In spite of a 234,000-bale increase in the anticipated size of the U.S. harvest to 18.5 million bales, the domestic market is likely to tighten even further, owing to soaring foreign demand. Projected exports jumped 700,000 bales last week to 15.0 million, the second-highest level on record. The bigger U.S. harvest and the outlook for increased foreign demand—particularly from China—bode well for bigger exports in the new marketing year. What’s more, at almost 6.0 million bales, 2010/11 commitments early this marketing year are at a record high and up 122.9% from this point a year earlier, hinting at bigger exports in 2010/11.

Faster growth in demand offset the projected increase in production, implying lower ending stocks and tighter fundamentals. At 3.2 million bales, the anticipated level of ending stocks at the conclusion of the new 2010/11 marketing year is down 300,000 bales from just last month, tightening the stocks-to-use ratio to 17.4%. In turn, average monthly prices have gradually risen over the last year and a half as this ratio has gradually tightened, as the graph below demonstrates. What’s more, this ratio is comparable to the 2003/04 level and approaching the record lows set in 1994 and 1995, suggesting average prices this marketing year may rival the elevated average prices set fifteen years ago.



Nearer term, the outlook for continued strengthening in the market may face serious fundamental and technical headwinds that hamper price. Fundamentally, only isolated trouble spots persist for the crop as harvest nears, particularly in parts of China, Pakistan, and the southern U.S. This outlook suggests the supply-side of the balance sheet may tighten in coming months, but only modestly. Revisions on the demand side also are likely to moderate, as prospects for slower growth in several major economies stifle expansion in cotton mill use. As a result, the 2010/11 balance sheet may be hard-pressed to tighten much more than currently anticipated.

Technically, soaring prices in recent weeks hint at a coming correction. While almost all short-, medium-, and longer-term indicators turned increasingly bullish with Friday’s close, the contrarian in us cautions it may be time to take away the punch bowl, at least for now. At an eye-watering 79.3, December’s Relative Strength Index rose to its most overbought level since March 2008 Friday, several standard deviations above its long-term mean of 50, and is virtually screaming for a near-term consolidation. On balance, while the recent surge in prices is reminiscent of the March 2008 spike, we look for near-term prices to flatten out as gains taper and not mirror the plunge that followed the market’s spike 29 months ago.

Weekly Commodity Market Recap: Cotton

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The persistent drumbeat of tight near-term supplies continues to drown out talk of a bigger harvest this autumn, helping drive futures higher. Nearby cotton prices extended their resurgence for the fifth straight week, climbing an impressive 204 points from the week before to finish at 84.40 cents per pound, the highest weekly close in almost four months. The most-traded December contract rose for the eleventh time in the last thirteen sessions to close Friday at 80.23, the highest in more than ten months. The near-term bulls point to withering certificated stocks and recent record flooding in Pakistan. But the longer-term bears suggest weather in key cotton-growing patches around the world will make a rebounding crop even bigger as harvest approaches.

Certificated stocks continue to plumb the lowest levels in years. At hardly more than 30,000 bales, it has been at least eight years since stocks have been this low. And without stocks, there is little chance for carry on the board. There doesn’t appear to be any prospect to begin rebuilding the stocks until harvest begins in earnest. Even then, merchants may choose to ship the cotton overseas rather than put it against the board. The earlier harvested portions of the crop in Georgia, Louisiana, Mississippi, Arkansas and Texas are already heavily committed for the December-January shipping period. This suggests much of the crop may never become certificated against the board this season, hinting at another piece of evidence supporting higher prices.

The recent deluge of rains in Pakistan is also helping support the market. The unusually heavy monsoonal precipitation is swelling rivers along the Indus river basin and threatening the heavily-irrigated domestic crop. Some sources estimate at least 1.3 million acres of farmland is flooded, but the degree of damage to the cotton crop is difficult to discern until floodwaters recede. Regardless, the excessive and unwelcome waters are sure to pare back the crop size and contribute to lower quality of harvestable bolls this fall. This outlook has already boosted local prices here and could spill over into Indian market prices soon.

While near-term supplies remain tight in many markets, weather in other cotton areas is boding well for the coming harvest. The near-ideal west Texas weather could prompt record yields and a crop size in the state in excess of nine million bales. Producers in this area are commenting that local cotton is in the best shape they have ever seen. In China, after poor weather caused a late start to spring plantings, generally favorable weather recently accelerated crop development. As a result, views on current crop conditions are turning more sanguine in many areas. In fact, boll opening already is occurring in Anhui, Hubei and Hebei. Similarly, heavier monsoon showers across much of India in recent weeks are easing concern for local cotton from drier delays earlier this spring. If seasonal weather rules through harvest, we would not be surprised to see larger crops produced in these three key global cotton patches.

A last key issue that will warrant attention in coming days is the pending release of reserve stocks in China. Following months of rumors, the China Cotton Association finally announced August 10th as the definite start of auctions of up to 600,000 metric tons of government surplus cotton that we first reported here. While this auction is likely to ease tight domestic fundamentals and weigh on prices in coming weeks, local prices far exceed quotes for comparable international growths. These issues impacting supply and demand are sure to influence the market in coming months, and may gain continued credence in the next forthcoming WASDE due Thursday.