Will Indian Cotton Export Ban Boost Prices again?

Following today's export ban by India, the question many are asking is if this move could be enough of a driver to propel prices to approach last year's highs.

In short, no, we do not see India’s suspension on cotton exports as enough of a catalyst to propel cotton to another rally similar to the 2010/11 surge that peaked well over $2.00/pound. Certainly, India is the second-largest producer and exporter of cotton in the world, and this move is likely prop up prices, if not give a boost to the market. But global fundamentals are quite different this year vs. last year and recent momentum was pointing to looser fundamentals ahead, unlike prospects for gradually tighter fundamentals witnessed about 1.5 years ago. What’s more, last year’s spike was the culmination of a ‘perfect storm’ of bullish ‘waves’ that all crashed together at the same time. These included tighter U.S & global balance sheets, record volatility, record backwardation, an unprecedented short squeeze in the U.S., and the weakest dollar in years, among a few. Today’s market certainly reflects a much different landscape.

Perhaps most importantly, today’s soft demand across the global textile supply chain is likely to keep cotton reined in well short of last year’s spike above $2.00/pound, regardless of India’s latest policy move.

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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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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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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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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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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After rocketing ahead in February to its highest point in two years, cotton futures prices retreated last week, falling four of five trading days as the latest WASDE report from the USDA failed to impress and prices responded both to overbought technicals and mounting concerns about the economy. The Nearby finished the week at 80.47 cents per pound, off 1.96 cents from the week before. As we suspected here, the latest USDA forecasts saw global production ease, while U.S. fundamentals were little changed from the previous month, supporting our notion that global drivers would have more of an impact on the market this week than the domestic market. In fact, one could argue that the ‘news’ of a smaller global crop had already been factored into the market, as this information had been widely publicized for some time. Aside from this issue, there were few fundamental surprises in the report to drive price, allowing bearish technicals and outside influences to dictate price for the week.

Weighing negatively on the market this week were several overbought indicators and more worries about the U.S. economy. For example, as prices soared to their two-year high in early March, the RSI signaled the need for a correction. At 77.72, this indicator reached its highest level in 21 months, a few standard deviations away from its long-term 50.0 mean. Economic news last week also weighed on the market. Among other news, weekly U.S. jobless claims for February were higher than expected, and Chinese inflation rose to a sixteen-month high, hinting that tighter monetary policy may stifle rapid consumer demand there later in 2010.

But after four straight losses, prices rebounded on Friday, recouping mid-week losses. Stronger-than-expected February retail sales figures encouraged shorts to cover on Friday, in spite of sagging clothing store sales. A weaker dollar on Friday also fueled speculation of a likely improvement in relatively unimpressive U.S. export sales. Friday’s Commitment of Traders report showed the large specs adding 4,101 longs and 412 shorts to their combined futures and options position in the week ending March 9th, helping spur the improvement in price. Technically, trades formed a ‘bullish engulfing’ pattern on the Japanese candlestick charts. What’s more, Chinese futures prices rebounded Monday, with Nearby ZCE prices reaching 16,295 yuan per ton ($1.08 per pound), close to the ZCE record-high set in early January. This late-week turnaround leaves us believing the market may have found significant near-term support. The longer-term question remains as to how much global cotton acreage will expand this spring, and how much further the bulls will drive the market before bigger crop prospects come into focus this fall.

Weekly Commodity Market Recap: Cotton

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

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

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

Weekly Commodity Market Recap: Cotton

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ICE U.S. cotton futures rocketed ahead for the second straight week, capping off nine consecutive days of higher closes on the robust outlook for bullish fundamentals in the next marketing year. The nearby soared 440 points for the week to 78.79 by Friday, the highest weekly close since its March 2008 spike. At the 2010 Ag Outlook Forum just outside Washington, DC last week, USDA analysts speculated that bullish fundamentals both in the U.S. and worldwide will persist into the new marketing year. Giving its first peek at a new-crop balance sheet, the USDA looks for global mill demand to outpace production for the fifth straight year, resulting in another decline in ending stocks in 2010/11. This would mean a world stocks-to-use ratio of 41.8%, down from 45.1% estimated for 2009/10 and the lowest since 1994/95, presumably boosting prices next year. Already, the marketing year-to-date average ‘A’ Index price is 75.0 cents per pound, with prices surpassing 83 cents by late February.

Echoing sentiment expressed earlier by others, the USDA believes the U.S. crop is likely to rebound from its lowest level in a quarter century on the outlook for a big jump in plantings and presumed normal yields across the cotton belt. Already, the most year-to-date precipitation in years has fallen around Lubbock here, boosting optimism for higher yields. But higher offtake may absorb the jump in production, leaving domestic ending stocks little changed. This year’s stocks-to-use ratio of 21% is projected to remain about the same in 2010/11, implying prices are likely to remain robust. The USDA projects the marketing year average U.S. price at 64 cents, compared with 62 cents for 2009/10.

While a myopic view of the fundamentals strongly points to even higher prices, we are cautious over the long term, as even higher prices may limit the number of mills able to pay these rates. As most any textile mill will acknowledge, downstream price pressures ensure that the only thing worse than high prices is volatile prices. And this marketing year has been full of both so far, hindering mills’ ability to forward price yarn quotes for remunerative—but still competitive—price points. Since beginning the marketing year at roughly 63 cents per pound, nearby prices are up almost 40% in less than six months. And while market fundamentals may point to continued gains in prices longer term, mills are unlikely to see remunerative prices paid for yarns, impacting both cotton share and viability for many. To avoid this dismal scenario, we encourage you to speak with one of our risk management consultants here to review your exposure to risk and see how we may be able to minimize this exposure for you.

Weekly Commodity Market Recap: Cotton

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After tumbling for five straight weeks to the lowest close in three months, nearby cotton futures soared last week, posting its biggest weekly jump in almost seven years. At 74.39 cents per pound, the market finished Friday up 777 points from a week earlier to the highest close since its January 4 peak. The dramatic rebound primarily is attributable to fundamental issues directly impacting the fiber, rather than external factors swaying the tide of most commodities.

In particular, a bullish late-season revision to the USDA’s monthly WASDE report helped set the tone for the week on Tuesday morning. The USDA revised its U.S. export forecast higher by one million bales from January, the largest increase in history at this point in the marketing year. The jump is in response to robust new sales each of the last several weeks and predicated on the belief that exportable supplies from key competitors in Brazil and India may dwindle sooner than expected. In turn, higher anticipated exports in 2009/10 drove projected ending stocks for this marketing year lower by one million bales, to 3.3 million. Forecasts for higher demand and lower ending stocks tightened the anticipated stocks-to-use ratio to 21.4%, the second lowest in a dozen years. These tighter fundamentals drove nearby futures limit-up in Tuesday trading, helping shake off the bearish pall hanging over the market in 2010. Additionally, as this anticipated ratio has gradually tightened each month over most of the marketing year, it has driven futures prices higher. February’s 21.4% stocks-to-use ratio implies further gains in price may be forthcoming in the near term.

Weekly Commodity Market Recap: Cotton

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After again largely ignoring fundamentals internal to the cotton market, cotton futures prices retreated for the fifth straight week, succumbing to the overarching bearish influence of a stronger dollar. The Nearby price on the ICE Futures U.S. exchange plunged 241 points from the previous week to 66.62 cents per pound, a two-month low. This weighed on every subsequent contract month, dragging each lower again, down for every week in 2010. While the week did produce some bullish news for cotton, the dollar remains the key drag on the market.

The bulls took little comfort in robust export sales and further evidence of a smaller Indian crop last week. Net upland sales jumped to a marketing-year high of 519,500 running bales, particularly driven by big volume to China. Weekly shipments also improved, reaching almost 250,000 bales, the second-highest point so far in 2009/10. Exports to mid-tier markets like Mexico, Thailand, and Peru also climbed to marketing-year highs, and market sentiment suggests shipments in coming days are also likely to remain strong.

More voices are adding to the cacophony of suspicion that India’s harvest size is overstated, echoing our long-held argument here. Most recently, the Cotton Association of India pegged the harvest size lower from their earlier forecasts at just 30.2 million bales (170kg), down half a million bales from their previous forecast just over two months ago. We would not be surprised to see forecasts ease even lower in coming months, heartening the bulls’ position.

In spite of these signals of tighter fundamentals last week, the dollar remains the 800-pound gorilla weighing on commodity markets, including cotton. Signs of debt troubles in several European markets are sinking the euro, driving the greenback higher and dragging commodity prices lower. After reaching a fourteen-month high earlier this year, the Reuters/CRB Index is down 35 points to 258.55, a three-month low. Cotton prices are lower in concert with the collapse in the broader index. If the lack of concrete proposals to the European debt concerns from this weekend’s G-7 meeting is any guide, the euro may remain under pressure in coming weeks, implying commodity prices—including cotton prices—also may struggle to post a sustained rebound in the near term.



Looking ahead, our estimates for changes to the forthcoming USDA WASDE forecasts portend tighter domestic markets for the current marketing year:

-U.S. production for 2009/2010: We see the USDA easing its production forecast for the fourth time in five months, down to 12.25 million bales. The volume of ginning and classing of this season's crop here and here remains behind this point last year, hinting that the anticipated harvest size will contract further. In fact, we would not be surprised to see the final crop size even lower—closer to 12.1 million—but we look for the USDA to make only another incremental step in that direction in its February report.

-U.S. exports for 2009/2010: We look for the USDA to revise its export forecast higher again in February, to 11.15 million bales. Already, this moving target has been revised 800,000 bales higher over the last five months, and particularly in light of robust export reports in recent weeks, we anticipate the actual level to be higher than the current 11.0 million-bale forecast.

-Ending stocks for 2009/2010: With a 150,000-bale increase in the harvest size, a 150,000-bale increase in exports, and no presumed change in mill use, ending stocks are likely to ease by 300,000 bales from January's 4.3 million bales to 4.0 million. If so, this would mark the fifth straight month of gradually lower ending stocks. Coupled with higher demand, the lower ending stocks imply a tighter anticipated stocks-to-use ratio for 2009/10, friendly to higher prices. As a result, we look for the market to grapple in coming weeks with the opposing prospects of tighter ending stocks in 2009/10 versus the heavy influence of a stronger dollar.

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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