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 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.