Weekly Commodity Market Recap: Cotton

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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



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

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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

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

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

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

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

Weekly Commodity Market Recap: Cotton

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A barrage of bearish data weighed on cotton prices last week, dragging U.S. and Chinese markets lower into an overdue correction, consolidating and setting the stage before prices resume their gradual march higher this winter. Following a move to new highs early last week, cotton prices on the ICE Futures U.S. tumbled three of the next four days, finishing Friday at 72.44 cents per pound, the lowest level in seven weeks. Several issues together pulled prices lower on the week, including prospects for looser anticipated global fundamentals on Tuesday’s WASDE report, rumors of fund balancing, lower Chinese futures prices, and the Chinese central bank’s raising of interest rates.

First, market sentiment points to higher global cotton production forecasts when the USDA releases its next WASDE report Tuesday morning, boosting anticipated carryover stocks. Here, beneficial rains across the eastern third of Australia over the last half month continue to ease crop concerns from just a few months ago. While the crop there still needs ample moisture during the crucial February fruiting period, ample December and January showers dramatically boosted yield prospects for one of the world’s leading cotton exporters. Similarly, excellent crop conditions across much of the Brazilian cotton belt here are helping improve harvest prospects in the Southern Hemisphere’s largest producer this year. Additionally, the latest data on the robust pace of cotton arrivals in Pakistan here continue to support our long-held view that production forecasts in this market remain too conservative. Together, should these harvest sizes be revised higher as we anticipate, the increase in global supply could temper much of the near-term enthusiasm for continued price gains.

A second issue that weighed on cotton prices last week was rumors of fund rebalancing and a rebound in the dollar. According to the CFTC Commitments of Traders Report, for the week ending January 5th, index funds were net sellers of only 123 contracts, which reduced their net long position to 80,336 contracts. Hedge funds, however, were more aggressive sellers, decreasing their net long position by 4,423 contracts to stand at 41,032. But several market watchers see this as profit-taking by long-only funds, and not an indication that index funds are any less bullish.

The dollar also dragged on many commodities last week, including cotton. In the first full week of trading in the New Year, the U.S. Dollar Index rebounded to 77.655, a three-week high. But Friday’s disappointing jobs report and higher oil prices are likely to temper gains in the greenback in coming days, improving the near-term outlook for cotton.

Lastly, U.S. futures prices were heavily influenced by China’s impact on the market. Plummeting cotton prices on China’s Zhengzhou Commodity Exchange (ZCE) dragged U.S. prices lower. The most-traded May contract on the ZCE fell 570 yuan per ton last week (3.8 cents per pound) on plunging volume and open interest, the biggest weekly drop in months. The drop in futures came as The People's Bank of China Thursday raised the interest rate on its three-month treasury bills for the first time since this summer, stoking fears that Beijing could start tightening monetary policy in the coming months. Market perception is that as the Chinese attempt to gently slow economic growth and head off inflation, consumption of raw materials will slow. This policy shift reverberated across cotton markets around the world, driving prices lower.

While we acknowledge the overdue need for this corrective consolidation in prices, we continue to expect prices to continue to move sideways to higher over the next few weeks, which will likely prompt a modest increase in U.S. cotton plantings in the spring.

Weekly Commodity Market Recap: Cotton

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Cotton enjoyed another week of gains, finishing the year with its highest weekly close since the March 2008 spike. Re-strengthening global demand signals continue to support price, along with soaring trade on China’s Zhengzhou Commodity Exchange (ZCE). A firmer demand picture came into focus this last week, framed by good news in several markets. U.S. export sales of Upland cotton hit a marketing year high of 349,576 bales during the previous week, with much of these sales to China. News of another month of double-digit growth in Pakistani cotton yarn exports here suggested fabric mills across Asia are ramping up production. Likewise, Thai cotton yarn exports detailed here soared at the fastest pace in six years, echoing this sentiment. Downstream, faster growth in retail apparel sales in several markets including Taiwan, Canada, and Poland here confirms the improving prospects for cotton mill demand, as once-wary shoppers begin to return to stores in key markets around the world.

A second key driver impacting prices both in the U.S. and around the world has been the impressive performance of futures trading on China’s ZCE. Prices on the most-trade May contract stand at a record level, followed by soaring volume and open interest. As we discuss here, in just the last week, the May contract soared 835 yuan (5.55 cents per pound) to its new record, as volume more than doubled over the same short period to a record 584,560 contracts. Short supplies, transportation bottlenecks, and faster growth in mill demand for cotton are helping propel Chinese cotton futures prices to these uncharted heights, but the potential for increased cotton plantings this spring may ease price pressure in coming months.

In light of these bullish fundamentals, we look for prices to continue to move sideways to higher over the next few weeks, which will likely prompt a sizable increase in U.S. cotton plantings in the spring. Wednesday morning the market will digest the latest economic outlook from the National Cotton Council, followed by a detailed supply/demand outlook from the International Cotton Advisory Committee and comments on regulatory oversight of the cotton market from CFTC Commissioner Michael Dunn. These reports could have an impact on both trading and price action in coming weeks, and will warrant close attention.

Weekly Commodity Market Recap: Cotton

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The holiday-shortened week saw a flurry of reports from around the globe that worked to tug the cotton market higher and lower, resulting in another week of little net change in cotton prices headed into the final trading week of the year. Over the last month, nearby cotton prices remain constrained to a relatively narrow 478-point trading range, with prices retreating three of four days traded last week closer to the lower end of that range. Even so, at 73.65 cents/lb, last week’s close suggests that cotton prices are poised to finish the year higher eight of the last nine months, with the highest monthly close in more than a year and a half.

Helping drive prices higher, reports last week added to sentiment of improving demand around the world. Evidence here shows cotton imports into Thailand—the second-largest cotton-consuming market in Southeast Asia—soared at the fastest pace in four years, spurred on by a re-strengthening currency and robust demand for cotton yarn exports. Fiber and textile prices in China here climbed to a 13-month high as output in the world’s largest textile producer re-accelerated even further. Similarly, Indian cotton textile production here jumped at a double-digit pace in October—the biggest increase in two and a half years—spurred on by the first year-over-year increase in textile exports in over twelve months. Further downstream, Canadian clothing store sales detailed here rose for the first time in thirteen months in October, supported by improving economic conditions in our neighbor to the north.

But to be sure, not all measures of demand last week were optimistic, offsetting the enthusiasm for higher cotton prices. Here, a streak of successive declines in German textile exports over the last two years is likely to drag textile output in this market to the biggest drop on record in 2009. And annualized mill consumption of cotton in the U.S. sank for the 23rd straight month in November here, falling just below the latest USDA projection for 2009/10, suggesting this forecast may be mildly overstated. U.S. cotton exports also continue to fare poorly in the latest week, and remain well off the pace necessary to reach the latest USDA forecast of 11.0 million bales this marketing year. Adding to the bearish concern, the latest data show Russian cotton yarn and fabric output are both likely to see a record plunge in 2009, with volume falling to the lowest levels years. And finally, while data from MasterCard Advisors' SpendingPulse estimated U.S. holiday sales expanded 3.6%, the report showed lower sales of women’s and specialty apparel, echoing our concerns for the crucial holiday shopping season here.

These offsetting signals add to the market’s hesitation and lack of clear direction in recent weeks. And after climbing each of the last three weeks, the dollar wavered last week, further clouding the outlook. We continue to think price may be near the bottom of its recent consolidation range, and may trade modestly higher into the New Year. But longer term, we look for U.S. spring cotton plantings to jump at a double-digit rate from last spring’s low, suggesting increased supplies will help counter the global trend of improving demand prospects in many markets, moderating the long-term uptrend in price.

Weekly Commodity Market Recap: Cotton

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As the holidays approach, the U.S. cotton market remains relatively quiet, locked in a narrow 240-point range over the last month, with little fundamental news of substance to steer price higher or lower in recent days. In the bears’ camp, most commodities were on the defensive last week as the dollar index rallied from its lowest level since August 2008 to a three-month high. Corn, wheat, and soybean each edged lower last week as the greenback rose for the third straight week. Also, a Memphis-based forecasting group released one of the first crop outlooks for 2010, calling for domestic cotton acres to expand about 10% from this year’s quarter-century low to 10.0 million acres. And while the longer-term outlook for the global textile complex continues to improve in the wake of last year’s economic contagion, several markets around the world still saw output fall again in the latest month—albeit at slower rates—postponing any premature calls of the end of the global textile recession.

The bulls take comfort from a few bits of news last week, offsetting the bears’ momentum and keeping cotton prices range-bound. Retail apparel markets in several countries continue to percolate, suggesting better, frothier days lie ahead. And news from China indicates that output in most sectors of China’s textile behemoth continues to re-accelerate, shaking off the lingering effects of last year’s slowdown. Shorter term, we are wary of choppy trading on holiday-induced lower volumes as the market trudges through this latest consolidation pattern. We remain cautiously bullish on price in the medium term, but believe the outlook for increased global plantings longer term will suppress the market’s exuberance for higher prices into the spring.

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.