Weekly Commodity Market Recap: Cotton

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Cotton futures climbed for seven of the last eight weeks to settle Friday at the highest weekly close in almost fifteen years, driven by a combination of bullish issues. Intraday nearby futures prices pierced 90 cents per pound Friday for the first time in almost two and a half years before finishing the week at 89.03 cents, the highest since September 1995. Most of the market’s support is due to supply-side concerns, ranging from the extent of damage from Pakistani flooding to drier conditions across much of the U.S. cotton belt to the record volume of on-call sales still waiting to be fixed.

First, as floodwaters begin to slowly recede across much of Pakistan, estimates of crop damage are beginning to come more into focus. While rice appears to receive the worst impact, the domestic cotton crop was inundated. Pakistan’s Ministry of Food and Agriculture estimates 15% of the harvest will be lost, reducing the cotton crop in the world’s fourth-largest producer to less than 9.2 million bales. What’s more, the Pakistan Meteorological Department still is reporting exceptionally heavy flooding in southern parts of Sindh, hinting that loss estimates could expand even further once observers get a clearer picture of the remaining crop when these floodwaters finally recede.

Anxious Pakistani mills are turning away from the flooded domestic crop to neighboring India to ensure a steady supply of cotton in coming months. As a result, Indian markets are firm with high demand and already-tight supply, propelling local prices even higher. In another flip/flop of policy, India is considering re-imposing an export quota and restrictive duty on new-crop cotton shipped abroad starting in October. Before it was removed earlier this summer here, the export duty was Rs. 2,500 per metric ton (2.4 cents/lb), but rumors are circulating that it may rise to Rs. 10,000 at the request of the domestic textile industry. These on-again, off-again restrictions are exasperating local exporters and foreign mills concerned over forward deals that have already been committed. In fact, almost 700,000 bales already are contracted to Pakistani buyers facing a big shortage in their crop caused by the worst flooding in decades, adding to mounting consternation and risk exposure for local buyers and sellers.

In the U.S., dry cotton areas in the Midsouth and parts of Texas are likely to see little chance for cool, moist relief in coming days, adding to concerns over mounting stress on the crop. As we discussed here, meteorologists look for a return of late-season heat across the eastern half of the cotton belt in September, owing to the Pacific La Niña. Combined with longer-term forecasts for drier conditions to persist across the Delta, the area is likely to stay abnormally hot and dry through harvest. Accordingly, while yields across the country still are likely to climb from last year, the outlook for the size of the crop is not as robust as just a few weeks ago, adding further bullish sentiment to the market.

A last issue that warrants attention is the influence of specs and the trade on the market. First, at 91,389 contracts, last week’s record amount of unfixed call sales implies there is an impressive volume for export waiting to fix prices on any market dips. What’s more, speculators added to their net long position again for the fourth straight week while the trade got shorter on increasing total open interest, trends that have helped buoy cotton futures over the same period. While there is no question that demand remains robust and supply concerns are mounting, we caution that when things look this bullish, it’s time to be careful.

Weekly Commodity Market Recap: Cotton

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

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

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



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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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Last week cotton enjoyed one of its best performances in months, as nearby prices rose to a five-week high on heightened concerns of diminishing near-term supplies and in response to a weaker dollar. In fact, every contract month closed up for the week on an improving technical and fundamental outlook, reaching multi-week highs. The October contract finished the week—and the marketing year—at 82.36 cents per pound, a 22-month high. December similarly fared well, closing higher seven of the last eight sessions before settling at 78.76 Friday afternoon, its highest daily finish in over a month.

First, the sinking value of the dollar is helping prop up a broad range of commodities, including cotton. After reaching a near-term high earlier in June, the U.S. Dollar Index—a measure of the value of the greenback relative to a basket of foreign currencies—gradually eroded, falling to 81.655 late last week, the lowest in over three months. The dollar tumbled to a new year-to-date low versus its Japanese cousin, and teeters on the verge of falling to the lowest level against the yen in fifteen years. And at 1.305, the dollar also is trading near a two and a half month low against the euro, as signs of a relatively faster rebound in Europe take hold. Should the dollar remain depressed, this is likely to support a host of commodity prices later this summer, including cotton.

Second, Traders are fretting over the very real possibility that few old-crop supplies will be available for near-term shipment before ample new-crop supplies enter the market in a few months. Certificated stocks withered further, easing to just 47,365 bales by the end of the marketing year last week, the lowest since 2004. Any late-harvested U.S. cotton is not eligible for delivery in December—one of the two most traded contracts—creating ample fear that cotton supplies available for December delivery will be extremely limited. Thus, merchants are loath to hedge against December unless they can deliver. As a result, the lingering backwardation between the October and December contracts caused by views on old-crop/new-crop supplies has spilled over into the December/July spread. While the relatively modest Dec/July inversion is not—yet—a harbinger of bearish days ahead in its own right, it may bear attention if the inversion persists and widens appreciably as December approaches expiration.

Weekly Commodity Market Recap: Cotton

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After beginning last week on a sour note, cotton futures on the ICE Futures U.S. rallied impressively in the second half of the week to finish at the highest close in over a month on sentiment of fading near-term supplies. The market sank Monday and Tuesday as traders took their cues from the weather and from a bearish shift in the latest spec/hedge report. Futures retreated a combined 218 points over these two days, with the most-traded December contract briefly touching 72.96 cents per pound during Tuesday trading, the lowest level in almost five months.

Near-ideal weather across West Texas weighed heavily on the market early in the week. Speculation is mounting that if weather remains favorable, cotton yields and production could expand much higher this season than originally thought. Anecdotally, many Texas producers report the best-looking crop in years. In its latest report on the shape of the Texas crop, the National Agricultural Statistics Service reported 74% of the state’s cotton was in good or excellent condition, the highest share for this same week in more than a quarter century of recordkeeping. What’s more, this share is up three percentage points from the previous week and eighteen points from just three weeks ago, suggesting that crop conditions—and prospects for higher yields—continue to improve with each passing week in the nation’s largest cotton-producing state.

Early in the week the latest spec/hedge report from the ICE exchange added to the bearish view. The report confirmed specs had turned net short for the first time in thirteen months, weighing further on the market. Specs are now net short 2.3% versus 1.9% net long the previous week. The net spec short position is 3,724 or 2.3% of total open interest, the most in seventeen months. After trending closely with the December contract for about a year and a half, the gradual erosion in net longs over the last two months confirms specs are increasingly disillusioned with the long side of the market, helping drag December lower.



But by Wednesday, market sentiment had turned more bullish, as traders turned their attention to the plummeting volume of certificated stocks still on hand in the U.S. By the end of the week, the volume of cert stocks deliverable against ICE futures contracts had fallen to 55,389 bales, the lowest in five and a half years. From a seasonal peak of 1.08 million hardly a month and a half ago, stocks are down more than a million bales, introducing a bit of panic buying into the market by late in the week. Dwindling exchange stocks are making commercial traders increasingly anxious that new-crop supplies may not replenish the current dearth of supplies by the time they need to take delivery, prompting the buying. From Tuesday’s low, December rebounded the next three days, rising a combined 233 points to 75.34 cents, the highest close in three weeks.

Looking ahead, the diverging trends between a net short spec/hedge report and dangerously low cert stocks are unlikely to be resolved soon, suggesting the market may see bigger-than-normal volatility in the near term. But longer term, once new-crop supplies begin to reach the market this fall, a rebound in certificated stocks to more normal levels may begin to weigh on the market. Should weather remain conducive for yields across much of West Texas, any renewed upswing in prices that began last week may prove difficult to sustain.

Weekly Commodity Market Recap: Cotton

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The most-traded December contract fell for the fourth straight week last week, finishing Friday at 73.96 cents per pound, the lowest weekly close in five months. In the U.S., weather typically is the biggest influence on cotton trading at this point in the year, and this season is no exception. The sentiment that a ‘big crop is getting bigger’ is commonly held across the Belt. Already, at 18.3 million bales, the latest forecasted harvest size from the USDA reflects a robust upswing in estimated cotton plantings from estimates just a few months ago and higher projections for yield. Even so, this higher target still may prove too low, given the increasingly optimistic view for the Texas crop here. While cotton across the southeastern U.S. struggled under near-record heat in June here, west Texas cotton received welcome showers that could be just what the crop there needs to rival record yields. The latest trend of daily prices for the October and December contracts reflects this view of a ‘big crop getting bigger’. Instead of the normal contango in the market, December presently is trading for 600 points less than October, suggesting the market expects a much-larger crop once the harvest is completed after the expiration of the October contract.


With roughly two-thirds of the global cotton crop grown in the northern hemisphere, summer weather is a driving force for cotton markets around the world at this point in the crop cycle. In China, home to the world’s largest cotton harvest, in spite of springtime planting delays, the crop is likely to surpass last year’s size, rising to roughly 33.0 million bales. In fact, the latest forecast from China’s National Cotton Market Monitoring System (NCMMS) here looks for a harvest 3.3% bigger than last year, concurring with USDA forecasts. And while the crop remains behind across much of the country, producers across China see development in recent days narrowing the gap, supporting the cautious optimism for yields and harvest size.

In India, where more land is planted to cotton than any other country, a lackluster monsoon has yet to crimp prospects for a record crop. While last week’s report from India’s Meteorology Department here suggests season-to-date rainfall is 13% below normal, no major damage has been reported to the crop yet. In fact, analysts believe that even if the monsoon remains similarly below normal for the rest of this season, the crop could still develop well, as long as rains are well distributed. So far this season, central and northeastern states remain relatively drier, while the southern half of the country has seen an abundance of showers. Should widespread showers pick up in coming weeks, Indian production could rise to a record 25.0 million bales on the strength of record plantings and higher yields, also helping to throttle back global prices in the new marketing year. But if the optimism begins to fade both in China from persistent crop delays and in India from uneven, scant monsoon rains, anticipated tight global stocks in the new marketing year could push average prices higher in 2010/11, no matter how big the west Texas crop may be.

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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Last week’s cotton market ended with little net change for most ICE Futures U.S. contracts, which masked a roller-coaster week consisting of a Wednesday plunge offsetting four ‘up’ days for the market. As July entered First Notice Day on Thursday, most attention turned to December and how global supply/demand fundamentals may drive this heavily-traded contract. Last week, much of the southeastern U.S., eastern China, and northern India continued to bake under hotter-than-normal conditions. Relief may be on the way for these areas in coming days, suggesting some improvement for the crops in these key regions of the world’s three largest producers.

Also on the supply side, rumors continue to swirl that China is about to boost the quantity of cotton available for domestic mills. While speculation on this issue has persisted for weeks, The China Cotton Association announced late last week the government plans to issue additional import quotas as early as this week. If this proves true, the rumored amount could push the total quotas issued this marketing year to 3.6 million metric tons (16.5 million bales), the second-highest year for imports on record.

But offsetting this good news for foreign exporters, confirmation came last week that China plans to release additional supplies of cotton from ample state reserves for the second time in a year. At 600,000 tons (2.8 million bales), this volume certainly would alleviate spinning mills’ tight inventories and likely would ease skyrocketing prices for domestic cotton within China recently reported here. While the commencement date, length of release, and rate of release have not been announced, if it echoes the earlier release announced here, it could throttle back recent soaring prices in the market.

On the demand side, signs of gradual improvement for the world economy are helping support cautious optimism for a continued rebound in global mill use of cotton. Aside from the well-reported gains in textile output in the major producers across Asia, several smaller producers also are showing improvement. Reports just last week from several mid-tier cotton-consuming industries around the world reflect this trend, including Colombia here, Russia here, the U.S., and the Philippines.

This pattern suggests that not only is global mill demand for cotton likely to outpace production again in 2010/11 as we have anticipated for months, but cotton use may be poised to climb beyond current forecasts, suggesting even more pressure on already-tight global cotton stocks. In fact, the latest USDA forecast pegs global cotton mill demand for the upcoming marketing year higher by 400,000 bales from its projection just a month earlier, which itself is up 2.7 million bales from this marketing year’s estimate. What’s more, we would not be surprised to see consumption forecasts climb higher in coming months, commencing as early as next week. If so, 2010/11 will mark the fifth straight year that global mill demand for cotton outpaces cotton production, drawing down cotton inventories worldwide and supporting the notion that average prices are likely to remain elevated in coming months.

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.