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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After reaching the highest levels in over two years the previous week, overbought cotton futures retreated last week, easing lower each of the first four days before rebounding modestly Friday as traders covered shorts and mills bought at these relatively lower prices. Nearby prices sank 207 points on the week to 84.13 cents per pound, easing in sympathy with a broad swath of commodities as the dollar re-strengthened. Brought on by Greek debt woes that threaten to spread across the European continent, the euro plunged last week, helping boost the dollar to 81.991 Friday, the highest weekly close in over a year. In turn, the higher dollar drove many commodity prices lower, including cotton. Lower unfixed call sales again last week foreshadowed the dip in futures prices. Even so, the CFTC Cotton On-Call position report shows a growing mass of mill buying under the market. Now at 2.6 million bales, the unfixed mill position should help support prices on any speculative related sell-off. The spec long position, which is much larger than the mill short position, has the advantage being able to roll forward. Mills must buy because they need the cotton, and most merchants would be unwilling to roll their contracts forward. It could be an interesting summer even if the weather cooperates.

By late in the week the dip in prices brought new business back to the market, boosted by continued signs of economic growth. The Commerce Department reported first quarter GDP rose an annualized 3.2%, the third consecutive quarter of expansion. What’s more, consumer spending led the growth, hinting at improving demand for cotton textiles and apparel in the world’s largest retail market. While evidence here confirms the recession had a devastating effect on per capita end use of cotton products in the U.S., a rising economic tide is likely to lift all ships, boosting fiber demand in 2010. A lackluster housing market and above-trend unemployment are likely to remain drags on net apparent consumption of cotton, but continued economic growth is likely to offset these negative forces, expanding cotton demand this year.

Away from the demand side, in the shorter term weather will become the dominant factor driving cotton prices, as reports of crop development and condition around the world weigh on the market. After a month of below-normal precipitation, Mato Grosso cotton in Brazil is in need of a good drenching before picking commences in earnest in coming weeks, else yields and production could suffer. Meanwhile, the Australian cotton harvest continues under clear skies and normal temperatures, boosting yield and quality prospects. With abundant year-to-date moisture levels here, tentative sentiment for higher yields in West Texas is widespread, while concern is mounting across the Southern Delta over too little rainfall. Given the persistent inversion in price between nearby contracts and more distant contracts, the market has long been hinting at a larger autumn harvest and increasing supplies for months. The question is whether—and how soon—this convergence in price between contract months happens as prices for more distant months firm, or if Nearby prices ease lower on signals of stumbling demand. Presently, we are not confident that either event will happen soon, suggesting this backwardation in the market may persist.

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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Futures prices rebounded during last week’s holiday-shortened trading, as a decline in the dollar and robust export sales were friendly to cotton prices, with futures remaining well within a six-cent trading range established over the last six weeks. Nearby cotton prices rose 181 points on the week to close at 81.50 cents per pound, with three days of higher prices offsetting Tuesday’s modest decline. Traders last week viewed the USDA’s Prospective Plantings report as a non-event. The 10.5 million-acre forecast for spring plantings was close to market consensus and our own projection discussed last week here. With this outlook already factored into the market, traders instead discerned price direction from other factors.

A more pronounced impact on the market came from a weaker dollar, which boosted prices for several commodities, including cotton. The U.S. Dollar Index lost over half a point last week, closing at 81.44. This spurred oil prices to almost $85/barrel late last week, nearing the highest point in seventeen months. Oil also is likely to benefit from Friday’s sanguine jobs data, igniting hopes of a pickup in energy demand. Longer term, higher oil prices could support higher synthetic fiber prices, helping shift demand back to cotton.

The weaker dollar also boosted prices for a host of commodities, helping drive the rebound in cotton prices. The Reuters/CRB Index jumped last week to more than 276.4, nearing its highest level in two and a half months. Part of the positive commodity price action was attributable to more positive manufacturing news. The latest report from the Institute for Supply Management showed manufacturing activity made its largest jump since 2004. The increase was driven by significant growth in new orders and production. Almost all manufacturing sectors screened in the report showed a jump in activity, echoing the vigor we are witnessing in the domestic textile sector. While the rise in this basket-price of commodities did little to boost prices last week for crops that compete with cotton for southern acres—particularly corn, wheat, and soybeans—the increase cemented sentiment that cotton will reclaim a large swath of acres lost to other crops over the last two years.

Closer to home, two key indicators helped propel cotton prices higher on the week. First, weekly export sales were surprisingly good with a total of 279,000 bales in new sales recorded. Shipments were also excellent at 301,500 bales. Also, rumors are spreading that China—the world’s largest cotton importer—is likely to increase its import quota again in coming weeks, boosting prospects for additional shipments before the end of the marketing year. This evidence prompted us to revise our U.S. export forecast higher than the USDA here, friendly to higher prices. A second key indicator is the recent surge in unfixed call sales. At 70,424 contracts, the volume in unfixed call sales is the highest in over two years, helping weekly cotton futures rebound to one of the highest closes in over two years.

As the marketing year winds down, trading in coming days is less likely to be influenced by the next USDA WASDE report due Friday and more likely to be driven by weather developments. We look for April’s WASDE to show modestly tighter fundamentals in the U.S., mostly due to higher U.S. exports this marketing year. But small adjustments to old-crop fundamentals also are likely to become more of a non-issue in coming weeks, as the market’s attention turns to the size of spring plantings in the northern hemisphere and weather conditions after germination.

Weekly Commodity Market Recap: Cotton

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Futures prices eased lower last week, remaining well within a six-cent trading range established over the last five weeks as concern mounts over soaring fiber costs and higher domestic cotton plantings this spring. Nearby cotton prices retreated 2.49 cents to finish the week at 79.69 cents per pound, the lowest weekly close since mid-February. While the fundamentals continue to point to higher prices for the 2010/11 marketing year, near-term bulls are running out of steam, promising to make for volatile spring trading.

A handful of factors that contributed to drive prices higher in recent months seem to be losing steam in recent days. First, on the old-crop supply side, government efforts in China to relieve transportation bottlenecks in Xinjiang Province—China’s largest cotton producer—finally seem to be having their desired effect. Daily railcars for moving cotton from farms in the West to mills in the East increased to 170-180 since March 23, and could possibly increase further to 250. While this is rather late in the procurement season for the area, the increase is likely to ease supply constraints somewhat, whether actual or perceived. Additionally, the dollar is trading at a nine-month high on European debt concerns that are sinking the euro, hindering gains in commodity prices.

On the demand side, complaints from downstream producers in different markets are mounting over perceived exorbitant yarn prices. Indian knitwear manufacturers are unsettled over soaring cotton and yarn prices, with reports suggesting the sector is planning to ask buyers to pay one-fifth more to meet rising yarn prices. Similarly in neighboring Pakistan, angst over soaring yarn prices and perceived tight supplies here is pitting the yarn sector against downstream interests like never before, with the exasperated government unlikely to find a suitable compromise to satisfy both sectors. In China, rapid gains in cotton and yarn prices also are eating into the profit of downstream manufacturers. In particular, smaller yarn and fabric makers are cutting production or increasing polyester use as we demonstrated here to combat the surge in cotton fiber and yarn prices.

Another consequence of the sustained rise in cotton prices witnessed over the last year is likely to be a dramatic jump in cotton acreage in several key producers around the world. In particular, an issue likely to be closely watched by the market this week is the annual Prospective Plantings report from the USDA. This report is expected to show increases of 1 to 1.5 million acres, with potential production of 16 million bales or more. This would mark a reversal in trend from the declines witnessed over each of the last three years and a dramatic rebound from the 9.1 million acres planted a year ago, the lowest in more than a quarter century. While a 16 million-bale crop is comparable to the average volume produced over the last three decades, it is much larger than the harvest sizes each of the last two years. While we remain bullish for price over the long term, these issues are likely to temper much of the enthusiasm for robust gains in price witnessed over the last year. Instead, more modest gains in the long term may be more likely, while downstream resistance from fabric and apparel manufacturers is likely to make for choppy trading in coming weeks.

Weekly Commodity Market Recap: Cotton

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Cotton prices managed to rebound last week, in spite of mounting bearish evidence hinting at the increased potential for a pullback. Viewed from the bulls’ perspective, cotton’s climb last week came on news of higher unfixed on-call sales and the biggest U.S. cotton exports in nine months. The CFTC’s latest Cotton on Call report indicates unfixed on-call sales are growing at a rapid pace, particularly in the July contract. Total unfixed on-call sales merchants made to textile mills jumped to 68,829 contracts, the highest in two years, supporting higher ICE futures. The July contract rose by 816 contracts to a record 23,159. There are only 11,713 unfixed on-call purchases merchants have made from growers, providing very little in the way of an “offset”. As mills continue to add to their on-call position, it represents more futures that will need to be bought during a smaller window of time, suggesting higher prices are likely.



The bulls also point to the latest report of robust sales and shipments abroad for cotton. Total exports of Upland and Pima cotton reached 312,661 480-lb. bales in the week ending March 11, driven by soaring volume to America’s largest market. Exports destined for Chinese textile mills surged to 152,268 bales, the highest level so far this marketing year. In fact, this weekly volume was almost as much as the U.S. shipped to all other markets combined, reflecting China’s expanding share of total U.S. cotton exports over the last several months. The surging shipments to China in recent weeks echo our observation here of rapid growth in total Chinese cotton imports and suggest cumulative U.S. exports to China this marketing year may climb to the second-highest level ever recorded, something certainly bullish for price.

But from a stronger dollar to higher acreage forecasts for spring plantings, different bearish indicators are looming and likely to offset much of the enthusiasm for higher prices in coming weeks. Greece’s ongoing debt problems led to a weaker euro and stronger dollar last week, limiting gains on commodities. The U.S. Dollar Index finished the week higher at 80.7, rivaling its highest level in 21 months and hindering gains across a variety of commodities.

Finally, some price impacts may be coming from excellent topsoil moisture reports across the South and private acreage estimates released last week. One planted acreage report disseminated last week pegged spring U.S. cotton plantings at 10.3 million acres, well up from a year earlier. The market is likely to trend sideways in coming days, in anticipation of the March 31 Prospective Plantings report from the USDA. While the market looks for an increase in cotton acres this spring, the question is how much. Certainly, weather in coming months will impact yields—something difficult to accurately gauge this early in the year—but one early hint at the potential for better-than-average yields is ample topsoil moisture. The latest nationwide map here shows much of the South is wetter than normal, with no cotton acres reported as abnormally dry. This early sign hints that the surge in price over the last year may slow in coming weeks under the weight of a much larger cotton crop.

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.