Weekly Commodity Market Recap: Cotton

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The cotton market digested a slew of new data last week ranging from tighter raw cotton fundamentals to lackluster domestic clothing store sales, but offsetting sentiment left futures trading relatively listless and little changed for the third straight week. The market began the week on a sanguine note following upbeat reports of improving retail demand in Germany here and France here, two of Europe’s largest apparel markets. Double-digit growth across most sectors of China’s textile industry propelled textile prices here to the highest levels this year, contributing to the bullish sentiment. Coupled with the first growth in textile and apparel output in Turkey in over a year and a half here, global textile markets are as optimistic on the future as they have been in two years.

But perhaps a telling event came Thursday on the release of the latest USDA supply/demand forecasts for this marketing year. While the lower-revised ending stocks exactly matched FCStone forecasts here and produced the most bullish stocks-to-use ratio in over a year and a half, the market effectively shrugged off the news, with futures stalling against overhead resistance and probing for underlying support. Pundits argue that the market may have already factored in these fundamentals. In fact, breaking news reported here last week that China would distribute quotas in April 2010 for another million tons of cotton imports did little to move the market. It seems no bullish news is able to drive futures higher, suggesting overbought conditions and a pending correction. Of course, funds simply may be taking money off the table prior to the year end, contributing to the lack of upward movement in price. Or the recent rebound in the dollar to seven-week highs may be hindering enthusiasm for higher fiber prices. Regardless, the stall has us concerned.

We won’t rule out that a dip may occur, but sentiment remains increasingly bullish both from the trade and speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain lackluster until after the New Year. Looking further into 2010, we also remain cautiously bullish through the winter, but acknowledge that a likely rebound in cotton plantings in the U.S. and China here this spring may temper enthusiasm for even higher prices that are already well above their long-term average.

Are ICE and ZCE Cotton Futures Poised to Strengthen Further in Second Half of 2009/10?

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After the unprecedented spike in global cotton prices witnessed in 2008 and the resultant shockwaves felt thereafter across the global cotton market, prices in 2009 returned to levels more in line with traditional influences. These drivers include factors internal and external to the cotton market, and show strong correlations to futures prices. Looking ahead to 2010, these signals suggest cotton prices are likely to remain firm, above their long-term average level, as the global economy re-accelerates from a tumultuous 2008, driving renewed growth aggregate demand for cotton textiles and apparel.

Perhaps one of the most influential drivers on global and U.S. cotton prices is fundamental analysis. The study of the ebb, flow and interaction of supply and demand yields insight into current price levels and can hint at the future direction of price. A measure of this interaction, the stocks-to-use ratio, is often strongly correlated with price. More specifically, the tighter or looser the ratio between anticipated ending stocks and expected demand changes, the higher or lower we can expect price to trend. This relationship is evident in the graph below, showing that in recent months, the forecasted stocks-to-use ratio for the U.S. cotton market has fallen, or tightened. As this has occurred, the monthly average futures price has risen in tandem, breaching 70 cents per pound over the first few days in December.

Analysis of the stocks-to-use ratio can yield important clues to the future direction of price. For example, the USDA’s November forecasted stocks-to-use ratio for the 2009/10 marketing year is 35.2%, the smallest ratio in fourteen months. Not coincidentally, November’s average prices for nearby cotton on ICE Futures U.S. were 68.73 cents per pound, the highest in fifteen months. Reports of likely changes in supply and demand can cause this anticipated ratio to rise or fall, in turn driving price lower or higher in tandem.

Looking ahead to 2010, we expect the U.S. stocks-to-use ratio to tighten further in coming months, suggesting price could strengthen even further. We base our forecast on prospects that the U.S. harvest size may be smaller than currently projected, and on the belief that U.S. exports may outpace the current target in the remaining months of this marketing year. Certainly, this bullish outlook is tempered by the notion that prices already outpace the level suggested by this historic relationship. This implies that any continued appreciation in futures prices may not be commensurate with continued declines in the stocks-to-use ratio. Regardless, we look for the market to remain firm well through winter, perhaps until attention turns to the outlook for higher cotton plantings again in the spring.

Looking more broadly across the U.S. economy, factors external to the cotton market are also having a strong influence over cotton prices. First, the weaker U.S. dollar is boosting the outlook for a host of exportable commodities, including cotton. Both the dollar and cotton prices moved in lock-step over the last two years and presently stand near levels not seen in sixteen months. The outlook for the dollar in 2010 is dependent upon myriad factors both in the U.S. and abroad, including the outlook for interest rates, capital markets, inflation, government policies, and other economic indicators. While it remains impossible to accurately forecast the value of the dollar, we, along with many other market observers, remain pessimistic on the prospects for the greenback, helping support the outlook for a range of commodity prices, including cotton.


Second, speaking of capital markets, cotton prices have had an uncanny correlation with equity prices in the U.S. recently. As darkening clouds over the U.S. economy grew more ominous in the final months of 2007, stock markets in the U.S. began a hasty retreat as investors moved money to safer investments. After peaking in October 2007, the Dow Jones Industrial Average lost more than half its value over the next year and a half, falling to its lowest level in a dozen years. Since then, the Dow has posted one of its biggest rebounds in history, soaring roughly 50% from its March 2009 low. The Dow now sits near its highest level in fourteen months. Similarly, after spiking to the highest level in years in early 2008, cotton futures prices plunged more than 60% over the next eight months to 39.14 cents per pound, the lowest level in more than six years. Since then, nearby cotton prices have steadily climbed, surpassing 70 cents for the first time in sixteen months. Similar to gauging the value of the dollar, forecasting stock prices naturally is next to impossible. But many analysts agree that the impressive jump in the Dow in 2009 is unlikely to be duplicated in 2010, suggesting that any continued re-strengthening in cotton prices is likely to come at a slower rate than witnessed this year.
Aside from fluctuations in cotton supply and demand and factors external to the cotton market, the sales of merchants and positions of large traders and funds in the market continue to be strongly correlated to cotton prices. Week-to-week on-call sales across all contract months continue their co-movement with nearby cotton futures over the last two years. In fact, less than two months ago unfixed call sales reached 54,135 contracts—their highest level in fourteen months—at the same time that weekly nearby prices surpassed 68 cents, the highest level in sixteen months. In the weeks since, a gap opened between the two measures. But we look for this divergence to narrow in coming months, whether in the form of lower cotton prices or higher unfixed call sales. Given the bullish other factors noted earlier, we are more confident that unfixed call sales will slowly expand to fill that gap.


The role of hedge and index funds is likely to remain integral to commodity prices—including cotton—well into 2010. The increasing prevalence of long-only commodity indexes and the increasing acceptance of commodities as an asset class are helping drive interest—and therefore volume—in this area, boosting prices. Likewise, the prominence of agricultural commodities in these indexes has substantially increased in recent years. The cotton market has enjoyed a relatively consistent share of the surge of index and hedge fund monies into the market over the last two years, supporting price. In fact, for well over two years, the ebb and flow of index funds’ net positions have mirrored the rise and fall of cotton prices. Just as the net position of index funds is hovering near a fourteen-month high, so too are cotton prices. Looking ahead, aside from political wrangling over new bills governing increased transparency for some larger market participants, we see little reason to expect the inflow of hedge and index funds to ease in 2010, supporting an outlook for robust price in the months ahead.

Lastly, we turn away from the U.S. futures market to the impressive performance of cotton on the Zhengzhou Commodity Exchange. Since commencing trading on the ZCE over five years ago, cotton futures prices have trended in step with their American counterparts, reflecting efficient market-clearing and price-discovery mechanisms in place in both markets. Clearly, the issues that impact price in one market are felt half a world away, driving price in the other market.

This relationship has been particularly evident over the last year, when prices on both the ICE Futures U.S. and the ZCE exchanges reached near-term lows on virtually the same day. Since then, nearby prices on both exchanges have risen in step with one another to the highest levels in roughly fourteen months. It is only over the last month that ZCE cotton prices continued to climb, far outpacing gains on the ICE and peaking recently at record levels just as market volume also soared to more than 500,000 contracts, also a record. This surge in price easily outpaces gains in downstream intermediate yarns and fabrics and appears inherently inflationary—and therefore unsustainable. While we are optimistic on the prospects for continued strength in global cotton prices into 2010, we are not as confident ZCE prices will be able to maintain such a premium. We expect that any continued gains in ICE futures prices are unlikely to be met with commensurate increases in ZCE prices. And should this sudden spike in ZCE volume and open interest suddenly plunge, we would expect Nearby prices in China to retreat closer in line with U.S. futures prices in coming months.

Weekly Commodity Market Recap: Cotton

Bullish internal influences grappled with bearish external drivers last week, keeping cotton mired within the previous week’s trading range. In the global cotton market, supply and demand indicators both hinted at tighter fundamentals in coming months. In the U.S., an early-season snow here blanketed much of the remaining unpicked northern cotton crop from New Mexico across the Mid-South. While this snow did not last long, this year’s crop is the latest on record and any remaining fiber still in the field is likely to see big increases in boll rot and declines in yield and quality in wintry weather increases. Across these states, only about 10% of the crop remains in the field, accounting for roughly 300,000 bales.

Globally, voices in Pakistan and India are adding to the growing chorus calling for all-out bans on cotton exports from both countries. Local industries in both markets are concerned over intensifying shortages of fiber and yarn here, prompting calls to both governments to take action. While we do not expect either administration to implement these requested bans, both governments will be obliged to listen to the concerns of the industries and may offer some token policy to encumber exports and placate the industries, either in the form of additional registrations or new export levies. While not as severe as an all-out ban, this action would remain bullish for global prices.

On the demand side, U.S. export sales were phenomenal for a holiday-shortened week, even if shipments lagged the pace we would have like to have seen. Net upland sales reached 250,700 running bales, the most in more than three months. China remained the dominant buyer, followed by strong sales to Turkey and surprisingly to Brazil. We are anxious to see if this jump will continue next week, or if mills are guilty of panic buying once again.

Speaking of textile mills, the weekly Cotton On-Call report here raised a few eyebrows. After falling for five straight weeks, unfixed on-call sales made by merchants to textile mills increased by 3,612 contracts last week and now stand at 49,582. Meanwhile, unfixed on-call purchases mills have made from growers grew only 92 contracts to 9,064. The March contract shows a greater imbalance, with unfixed on-call sales increasing 5,413 to 21,111 while on-call purchases fell 360 to 3,258 contracts. If mills are not proactive about fixing their March cotton, it is not entirely out of the question that we may see another bullish repeat of the December situation where mills need to fix, and there are few sellers left right before first notice day arrives.

Outside the cotton markets last week a stronger dollar, a retreat in crude oil prices, steep losses in gold futures and weak prices for grains all weighed on cotton futures. In spite of the bullish influences noted earlier, nearby cotton futures sank two points from the week before to 73.82 cents as these external factors weighed on price. Late in the week, a rally in the dollar, spurred by thoughts that interest rates may rise sooner rather than later after the economy lost a much fewer-than-expected 11,000 jobs last month, exerted broad influence on commodities. NYMEX oil sank to $75.47 last week, its lowest weekly close in two months. After soaring thirteen of the last fifteen weeks to a record high last week, gold also lost some of its luster following a Friday sell-off, sinking well below $1,200/ounce. Alternative crops also wilted under the dollar pressure. After reaching a six-month high last Monday, nearby wheat futures fell each of the next four days, trending lower in step each day with lower corn prices. As these opposing forces jostle for the dominant influence over cotton prices, we still look for the market to move higher, just not quite yet.

Weekly Commodity Market Recap: Cotton

Cotton futures rose last week to finish at the highest close in sixteen months, owing to factors both internal and external to the market. Internally, projected supply and demand trends continue to point to higher prices. In the U.S., damage from the remnants of Tropical Storm Ida is likely to pare back domestic production prospects across much of the Southeast even further. Season-to-date, less than five million bales of cotton have been classed—hardly 70% of this point last year—suggesting production is likely to fall well short of last year’s 12.8 million-bale crop. Elsewhere, India’s Cotton Advisory Board added to the growing cacophony of analysts believing the local crop is likely to be smaller than earlier forecasts. At 23.0 million 480-lb. bales, their latest projection is well below the USDA's 24.25 million-bale November projection. And in China, a first look at the quality of this season’s crop shows length, micronaire, and grade are all poorer than by this point last year, suggesting demand for better-quality foreign growths may pick up in coming months. Also in China, the market shrugged off news of a third round of reserve auctions by the NDRC, with the nearby ZCE cotton contract surging limit-up in its last session to the highest close in over a year and a half. Clearly, the bulls are having their way with the market over recent weeks.

Outside the cotton market, re-strengthening in the broader commodity complex is helping buoy cotton prices. At 75.07, the dollar is teetering on the edge of falling to its lowest level in more than fifteen months, spurring a broad array of commodity prices, including cotton. The Reuters/CRB Index is flirting with its highest close in fourteen months, while gold stands at a record, more than $1,170/ounce. And recent news of existing home sales jumping much more than expected to the highest level since July 2007 is likely to bode well for the outlook for demand for cotton home textiles, further supporting the bullish sentiment behind higher cotton prices.

Weekly Commodity Market Recap: Cotton

Unfolding events last week generally were friendly to the market, helping nearby cotton futures reach the highest daily close in fourteen months, before a collapse in technicals settled the week’s activity with little net change from the previous week. The remnants of Hurricane Ida drenched open-boll cotton from Alabama to Virginia last week, with pockets receiving up to eight inches of rain in hardly 48 hours. In particular, the North Carolina crop, which had been expecting record yields prior to the arrival of the storm, roughly 330,000 potential bales of cotton still on the stalk in the state were exposed to excessive rainfall, strongly suggesting quality may be seriously compromised as a result. Gusty winds later in the week then blew much of the heavy, soaked bolls to the ground, where they are unable to be harvested, implying yields in the state also may suffer.

Tuesday’s release of new supply/demand forecasts from the USDA generally mirrored our forecasts here, showing an outlook for tighter fundamentals, both in the U.S. and worldwide. A 502,000-bale decline from just last month in the anticipated size of the U.S. crop is likely to result in the smallest harvest in two decades. Similarly, the USDA shaved another million bales off the size of the Chinese crop for the second straight month, while historic revisions to Bangladeshi cotton consumption propelled mill demand there to a record 4.0 million bales this year. On balance, lower production and higher demand reduced projected ending stocks from last month both in the U.S. and worldwide, resulting in tighter stocks-to-use ratios, fundamentals friendly to prices. Accordingly, nearby futures closed Tuesday at 75.11 cents per pound, matching the highest close since August 2008.

Technical trading ruled later in the week, with cotton receiving little, if any, assistance from outside markets. Nearby futures moved in mirror-opposite step to the dollar each of the last nine sessions, and settled lower in the second half of the week as the dollar rebounded off fourteen-month lows. After climbing to a fourteen-month high in late October and establishing firm resistance, cotton prices remain constrained to a three-hundred point trading channel over the last few weeks. In the shorter term, we look for the market to take a second look at support levels at 69.75 and 68.80 cents per pound before challenging Tuesday’s fourteen-month high of 74.27 cents in the longer term.

Weekly Commodity Market Recap: Cotton

Cotton prices crept higher last week, as concern over the outlook for yield and quality of the Mid-South crop outweighed bearish influences from outside markets. As we feared here, the month concluded as the wettest October in over a century for much of the Delta area planted to cotton, causing the most delayed harvest on record. Additionally, the drenching showers in Delta cropland is impacting quality of the crop, ranging from boll rot and yellowing of the cotton fibers to lower average strength detailed here. While producers in the region are likely to rapidly advance picking under clear skies in the coming week, the damage has been done; the next USDA crop report in a week is likely to show a dramatic drop in the size of the Mid-South cotton harvest, buoying cotton prices.

In the shorter term, price action is likely to remain choppy, as the market ebbs and flows between good and bad news on the economy. Traders were quick to dismiss Thursday’s news of robust expansion in third-quarter U.S. economic activity, after Friday’s disappointing spending data and considering the skewed effect from government spending and one-time stimulus measures in the housing and auto sectors. On balance, the dollar is solidly up from its fourteen-month low set a week ago, hindering continued gains across a wide range of commodities, including cotton.

Total open interest has been on a tear recently, expanding to over 185,000 contracts by late October, the highest in over a year. Not coincidentally, this comes as nearby cotton futures finished last week at their highest weekly close in fifteen months. Even so, speculators widely believe cotton is undervalued, and torrential, record rains across U.S. Delta cotton is compounding speculator resolve. Technical traders see rising prices and open interest and believe another push up is coming. While open interest is at its highest level since October 2008, we note that market open interest stayed above current levels for twenty months prior to last October, suggesting the market may have much longer to persist at or above these levels.

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

Buoyed by supply concerns and bullish outside influences, cotton prices extended their impressive streak of gains last week, rising to the highest levels in more than fourteen months. December futures rose for the eighth time in ten sessions Friday, up more than 750 points over the last two weeks. At 68.21 cents per pound, the December contract finished the week up for the fifth time in the last seven weeks as the bulls clearly dominated the news.

Concerns continue to mount over harvest prospects in several markets. In particular, Delta cotton fields in the U.S. remain soggy from persistent rains over the last month, hindering and delaying harvesting. Evidence here shows near-record rains fell over recent weeks in the area, and are likely to damage yield and quality to cotton from the region. Also, after suffering through its third summer of drought, recent downpours in California discussed here have come at a most unwelcome time, with virtually all the cotton bolls open, but hardly 6% of the crop harvested. Adding to the dismal outlook, Hurricane Rick in the eastern Pacific here may complicate harvests in Texas closer to the weekend, further compromising the U.S. crop.

Too much rainfall also remains a concern in China, where futures prices are flirting with their highest levels in almost a year and a half. Several eastern provinces report delays in harvesting and damage to quality from untimely rains, driving local prices higher. In fact, even with prices continuing to firm, evidence here shows many producers remain reluctant to sell, expecting prices to rise further. Recently-revised forecasts promulgated within the country here point to lower production and higher demand, supporting this sentiment, boosting domestic prices.

Even away from the fundamentals, other signs point to continued strengthening in price. The dollar continues to sink lower, plunging to its lowest weekly close in fourteen months, helping boost a wide range of commodity prices. Cheerful words from the Fed and the Treasury are doing little to turn investor sentiment back to the dollar, particularly after last week’s news of a record $1.4 trillion deficit in the U.S. Also, money flow into cotton has been impressive and open interest is exploding. New speculative money matched up against new commercial hedging has amplified the expansion of open interest. And unfixed call sales reported here in last week’s Cotton on Call report rose to a thirteen-month high, supporting continued gains in price.

This string of higher closes is reminiscent of the period two years ago when futures began their march to the highest levels in years, culminating in the March 2008 spike. While this is not the same market—with the same outside influences and hysteria driving prices higher—the trend remains firmly with the bulls, even as the bears point to the need for a correction. For now the market has some strong upward momentum.

Weekly Commodity Market Recap: Cotton

After retreating the two previous weeks, cotton prices firmed last week, supported by external and internal factors that were friendly to the market. Nearby cotton prices in the U.S. rose 236 points on the week to finish at 63.02 cents per pound, the highest close in three weeks. Outside influences boosting cotton futures included rebounding stock and commodity prices and a weaker dollar, while the internal factors of tighter supply/demand estimates from the USDA and higher unfixed call sales helped reverse last week’s slide.

Exogenous factors continue to have a large influence over the cotton market. Cotton prices responded to an improving stock market, as the Dow Jones Industrial Average gained 372 points on the week to flirt with its highest level in a year. Higher prices for key commodities also helped boost cotton futures. Corn, soybean, and wheat all saw solid gains on the week, as prices in the broader commodity complex rose in response to a weaker dollar. The CRB Index of nineteen raw materials saw its biggest weekly jump since the spring, finishing at its highest weekly close in two months. Speaking of the dollar, the greenback sagged further last week on speculation the Federal Reserve will trail other central banks in raising interest rates, making the currency less attractive. A rising cacophony of voices around the world questioning the reserve status of the dollar doesn’t help bolster sentiment for the currency, either.

Improving fundamentals more directly tied to the cotton markets also pointed to firmer prices last week. As we expected here, a report from the USDA anticipating smaller ending stocks domestically and worldwide this marketing year helped buoy prices. Here the USDA lowered the projected harvest size in the U.S. by 440,000 bales from last month, with most of the decline coming from Texas. This leaves us believing production may decline further in coming months, as many analysts are looking for lower yields and quality from Mid-South states. Worldwide, production forecasts here sank 1.3 million bales from last month, with the Chinese harvest withering by one million bales. Additionally, the latest volume of “on call’ positions reported by merchants here jumped to the highest level in more than a year, carrying cotton prices higher. At 50,423 contracts, unfixed call sales outnumber unfixed call purchases by more than three-to-one, the widest gap in more than a year.

Looking ahead, we are mildly bullish in the short term. We continue to feel the damage to the Mid-South crop is not fully reflected in the U.S. production outlook. Further, there is more adverse weather in the forecast, which doesn’t make physical traders necessarily bullish, rather more hesitant to be very bearish. Speculators are just plain bullish and appear ready to exact continued pressure on the unfixed spinners. We look for December to have room to strengthen further in coming weeks, likely beyond near-term resistance levels.

Weekly Commodity Market Recap: Cotton

After rising each of the previous three weeks, cotton futures retreated last week on weaker outside influences, fund selling, better harvest weather, and bearish technical signals. After cresting at the highest level in more than a year, nearby prices dropped 124 points on the week to 61.94 cents per pound, pulled lower by Friday’s nearly limit-down close. The broader commodity complex saw general weakness over recent days, as the CRB Index eased lower for the week. This broad-based weakness weighed on cotton prices as the dollar posted a modest recovery last week. After falling to a 13-month low, the U.S. Dollar Index rebounded late in the week to a three-week high before settling at 77.02, up 35 points on the week. Also, confirming the relationship we showed here, weaker equities took a toll on the cotton market. After climbing to its highest level in almost a year, the Dow Jones Industrial Average slipped last week, dragging cotton prices lower. Weaker commodity prices, a stronger dollar, and lower stock prices together cast a pall over the cotton market, helping drag every contract month for the next two years lower for the week.

Fund selling also contributed to weigh on cotton prices last week. Mirroring the rise in cotton prices over the last year, index funds’ net position rose to 75,219 contracts a week ago, the highest in twelve months. This left the market vulnerable to a setback that we suggested here. Accordingly, last week’s fund selling drove this net position lower to 74,741, prompting the exit in the market late in the week.

Weather has turned much more favorable across the U.S. cotton belt in recent days, improving the yield outlook from earlier in September. While the Delta and areas of the Southeast received heavy rains over the previous two weeks here, conditions turned drier this weekend and are expected to remain mostly dry for the week. The forecast for the next few days here has the Delta and Southeast warming up and drying out, which should promote boll opening and early harvesting. In West Texas, warmer, sunny conditions will prevail this week. While the recent deluge in rains slowed the development and harvesting of the crop, the warmer, dry days this week will be welcome across the Belt.

Weaker technicals also pressured cotton prices lower on the week. By climbing to a new high only to falter to a low by the end of the week sets up a bearish outside range reversal to the downside and hints at additional selling early this week. A hook reversal late in the week added to the bearish sentiment. And after signaling overbought conditions by breaching the critical 70-level on the RSI late the week before, lower prices reduced this indicator to a more moderate range. The market has been due for a correction, and last week's activity seemed to show just that.

Weekly Commodity Market Recap: Cotton

Cotton futures continued their impressive move higher last week on new bullish fundamental and technical signals, with Nearby prices rising for the third straight week to the highest close in more than a year. The most-traded December contract extended its streak of daily gains to twelve straight days, the longest streak in the contract’s life. Last week’s strength in the cotton market came from both internal and external influences. Worries over crop prospects in the U.S., China, and the Indian subcontinent combined with a weaker dollar and firmer stock market helped buoy prices. Rainy weather in the Delta and Southeast here are raising yield and especially quality concerns for the U.S. crop. Similarly, too much rain in Anhui here and Shandong here are suspending cotton procurement and likely to negatively impact crop yield in these key Chinese provinces. Conversely, a premature end to an already lackluster monsoon in India here prompted the USDA recently to pare back its forecast for the Indian crop by one million bales, limiting output in the country that plants more land to cotton than any other. And extensive damage from insects and leaf curl virus in Pakistan here are likely to prompt increased need for foreign cottons in the world’s third-largest import market in coming months. These bullish fundamental signals helped push futures prices on every contract month higher last week, with the Nearby closing at 63.18 cents per pound, its highest finish since September 2008.

Outside influences also are helping support cotton prices. Since reaching a near-term high in March, the dollar remains on its slippery slide, falling against a basket of currencies. The U.S. Dollar Index closed down last week for the third straight time, falling to 76.67, its lowest close in more than thirteen months, driving commodity prices higher.

Mirroring similar relationships noted in other commodities, cotton is also enjoying a rebound in prices from the lift in equities. Since reaching a near-term low six months ago, the Dow Jones Industrial Average closed up again last week, reaching 9,838, the highest point in almost a year. This bottom, inflection point, and subsequent rise mirrors a similar trend in Nearby cotton prices. Several technical indicators—particularly the RSI—are showing overbought conditions. And with a global stocks-to-use ratio likely to be only modestly tighter from last year, we are not confident the market can justify prices much above these levels. Accordingly, we look for prices to ease in the near term as harvest reports begin to accumulate over the next month.

Weekly Commodity Market Recap: Cotton

Last week’s cotton market saw Nearby ICE prices climb for the second straight week as more signs of improving demand are emerging, but an unimpressive WASDE report from the USDA, better yield prospects in several countries, and seasonal pressures may temper price gains in the near term. Nearby prices on the ICE Futures U.S. exchange rose late in the week for the ninth time in the last eleven sessions, trading over 60 cents for the first time in almost a month. Similarly, most-traded December closed up for the tenth time in eleven days, finishing the week at 61.24 cents per pound, the highest close since August 13.

Hints at improving demand are taking root around the globe, buoying price. China’s Keqiao Textile Index—a gauge of textile and fiber prices—rose for the fifth time in six weeks last week here as traders are becoming more confident of an improving outlook. August yarn production in China—a proxy of cotton mill usage—rose 12.7% from a year ago to 2.1 million tons, extending its streak of gains. Further downstream, retail apparel sales rebounded in a number of markets, supporting the gains in textile output. France, Australia, Brazil, and Germany all reported improved consumer demand for clothing in the latest month. While we expect gains in retail demand to remain tepid in coming months, we look for the improved demand to spread to more countries as markets rebound from a tumultuous last year.

At the same time, supply-side signals may hinder the continuation of the recent streak of firmer prices. Trading activity last week saw the latest release of supply/demand forecasts from the USDA, a report generally viewed as neutral to the market. In the U.S., anticipated higher production and exports offset one another, resulting in no net change in expected ending stocks in 2009/10. But more recently, continued downpours across much of Texas are likely to boost yield potential around Lubbock in coming weeks. Globally, a million-bale decline in Indian production and no sizable change in demand tightened the anticipated world stock-to-use ratio as we expected here. Lastly, seasonal harvest pressures will likely start weighing on the market soon, particularly if crop conditions continue to improve. For these reasons, we not as confident that the streak of steadily higher daily closes will persist for another week as boll opening accelerates and harvest commences.

Weekly Commodity Market Recap: Cotton

After retreating for three straight weeks, cotton prices managed to post a modest rebound last week, buoyed by a weaker dollar and indications that consumers might be set to start shopping again as the holidays approach. But supply-side pressures on the crops in major producers may limit this bullish sentiment in coming days as the market awaits the newest crop report from the USDA later this week.
Cotton prices extended their gains late last week on the back of a weaker dollar. Since finishing last week near the low end of its recent trading range, Nearby cotton futures are up six of the last seven sessions, closing last week at 57.53 cents per pound. Despite losses last week in grains, a declining dollar continues to support cotton prices. The greenback slid for the seventh time in nine weeks, threatening to fall to its lowest level in a year. The Dollar Index on ICE Futures U.S. eased to 78.14 Friday as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven. Cotton prices’ negative correlation against fluctuations in the dollar has been particularly impressive over the last year and a half, hinting that if this relationship persists, there may be more upside potential for cotton in coming weeks.



Adding to this bullish support are indications that consumers might be preparing to start shopping again, just in time for the holiday shopping season. Although sales were down again in August at most U.S. apparel retailers here and the unemployment rate rose to a 26-year high here, they were not as bad as expected, putting some tentative hope in the market. However, we are not as optimistic, and look for same-store sales at most clothing retailers to continue to post losses—albeit at a slower rate—in coming months, with comps roughly flat by Christmas.
On the supply side, the market is still waiting for a better indication of this year's crop in the world’s largest cotton-producing markets. The U.S., India, and China each have had some challenges this year, but have managed to wriggle through them without noticeably large problems resulting. South Texas cotton remains parched, with total agricultural losses in the state here approaching a record $4.1 billion. Some eastern provinces in China saw damaging wind and rain from Typhoon Morakot here. And India received unimpressive monsoonal rains earlier this summer, only to enjoy late-season onset of ample precipitation here. However, the stress put on these crops, mostly due to swings back and forth from very dry to very wet conditions, could end up causing lower yields. Traders will likely be hesitant to carry prices strongly higher or lower until they get a better idea of the crop size in the latest USDA report due at the end of the week.