Weekly Commodity Market Recap: Cotton

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The ‘ascent’ portion of cotton’s roller-coaster ride continued last week, with a weak dollar and global supply concerns driving the market higher. While trading on the ICE Futures U.S. was constrained to an inside weekly range, nearby December prices still jumped 984 points from last week’s finish to 119.71 cents/lb by Friday afternoon, the highest weekly close in 140 years. This latest advance marks the thirteenth higher weekly close in the last sixteen weeks. Not since another supply constraint—a northern blockade of southern commerce during the American Civil War in the 1860s—have cotton prices been as high.

Issues driving the market last week primarily came from developments in China and the U.S., together accounting for about two-fifths of global cotton production. In China, an unexpected bump in interest rates—the first since 2007—sent traders scrambling. The action could hinder textile exports from the world’s largest textile producer and help curb excessive speculation in some markets. While this bearish news normally would be likely to exert some pressure on domestic prices, fundamental support remains intact and local cotton prices are still on the rise. On balance, late-week declines in the dollar overshadowed its Tuesday rebound from the interest rate move, pulling the greenback even lower and boosting prices for a range of commodities—including cotton—even higher.

Across China, new weather concerns discussed here are dimming producers’ sentiment for yield, production, and quality across much of the country. Parts of Anhui, Shaanxi, and Xinjiang reported either cooler or wetter conditions over the last week, unwelcome news for the world’s largest cotton producer. What’s more, this weekend a new northern cold front plowed south across unpicked cotton in China, bringing more strong winds, colder temperatures, and unwelcome rains to much of China. The country’s main meteorological agency is calling for temperatures to plunge 14-16 °C shortly in Hebei, Shandong, and Jiangsu, slowing harvesting and hurting fiber quality. Already, key forecasting organizations are paring back their projections—again—for the size of this year’s China harvest.

By Friday, the market soared limit up on news of heavy overnight rain and hail across the Texas High Plains discussed here. Almost four inches of rain Thursday evening pounded fields full of beautiful pre-sold cotton, suggesting yield losses and discoloration may be in the offing for the local crop. With bolls open on virtually all the state’s cotton but the Texas harvest only one-quarter complete, the timing could not have been worse. While damage estimates are premature right now, early guesses figure 50,000 to 100,000 bales may have been lost.

The same old approach for spinning mills of buying on-call and hoping for a pullback is going wrong in the worst of ways. Conditioned by years of oversupply, temporary price spikes, and virtually no risk management, spinners outside China have been caught unprepared for the great bull market of 2010 as the balance sheet continues to tighten. While there is grumbling in the mill community about idling spindles rather than running such expensive cotton, there still is scant evidence that demand is ebbing. After the market recovered so quickly from last week’s sell-off, we see little to stop it from making new highs in the coming week. To learn more about how we can help you better manage this exposure with a comprehensive risk management strategy to protect against the market’s peaks and swoons, please click here.

Weekly Commodity Market Recap: Cotton

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Cotton saw one of its most volatile periods on record last week, driven by a rush of panic buying and then panic selling as futures soared to unprecedented heights, only to tumble limit-down late in the week. Those two old market movers—fear and greed—clearly were in play last week, only on different days, it would seem. Cotton traded to new highs three different days, only to see its biggest collapse—and widest one-day range—in years by Friday. On balance, for the week the market touched record-high prices, ranged over 1,255 points, and covered an unheard-of 993 points on Friday alone.

Trading on the ICE Futures U.S. began the week with a bang, soaring limit-up on news that India had suspended registrations of cotton for export this year, only ten days after opening the registration period. Indian traders had already registered the government’s maximum of 5.5 million bales, reflecting not only soaring foreign demand but locals’ concern that the government may hinder cotton exports again in coming months.

Following Tuesday’s consolidation and an inside day Wednesday, the market was poised for another climb and test of its all-time record high Thursday. A confluence of several factors around the world helped propel U.S. cotton futures dramatically higher this day. First, cotton on China’s Zhengzhou Commodity Exchange closed limit-up on near-record open interest, following news of mills’ unusually low cotton inventories across the country. Next, news from India further fueled this bullish fire. The country’s textile sector redoubled its calls to the government to postpone cotton exports until 2011, to the panicked dismay of importing mills across Asia. Also, disappointing economic reports in the U.S. paved the way for further quantitative easing by the Fed, dragging the dollar lower and pushing commodities higher. As a result, all 2010/11 contracts closed limit-up again. Synthetic prices for December closed at 118.87 cents/lb, setting a record high in the 140-year history of the exchange.

After gapping higher on follow-though trading, the bulls lost their appetite in early Friday action and the bears ruled the day. From the intra-day high of 119.80 cents/lb—a record—the market plummeted an astounding 993 points to settle limit down at 109.87, crashing -8.3%, the largest non-synthetic daily range ever.

In spite of Friday’s tumble, cotton futures still managed to rise for the week, up for the twelfth time in the last fifteen weeks. Several factors support this string of gains to the highest weekly close in fifteen years. Unfixed call sales stand at a record level here, and many spinners still need to buy December to fix their on-call purchases. Surging U.S. export commitments detailed here remain on a record pace, despite a modest start to shipments this marketing year. And suspicions are rising here of disappointing yields in China, hinting at more imports in coming months. Not to mention, the impact from a weaker dollar and bullish specs and funds cannot be overstated. With little fundamental history to suggest a price range for the market and constrain these volatile swings, it appears these wild fluctuations may persist, reflecting the need for a comprehensive risk management strategy to protect against the market’s peaks and swoons. To learn more about how we can help you manage this risk, please click here.

Weekly Commodity Market Recap: Cotton

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Cotton rebounded impressively last week on the ICE Futures U.S., buoyed by a converging swell of different factors that lifted the market to the highest levels in years. Nearby December futures soared 915 points on the week to close Friday at 107.17 cents per pound, the highest close in more than fifteen years. The market has risen eleven of the last fourteen weeks, tacking on 37.7% in less than three and a half months, one of the steepest and biggest gains ever recorded. Every contract enjoyed the upswing last week, with several climbing to life-of-contract highs Friday. From China’s return from holiday to India’s soaring export registrations to tighter fundamentals to a weaker dollar, several issues were at play to boost cotton prices last week.

First, the siren song of soaring spot and forward markets in China helped propel global cotton prices higher. After returning from the week-long National Day holidays, Chinese traders wasted little time in driving cotton prices on the Zhengzhou Commodity Exchange limit-up late in the week. While harvest weather was favorably dry across much of the country during the break, picking remains behind schedule and mills’ appetite for the fiber remained voracious, in spite of even higher prices. Accordingly, traders were in no mood to be caught short, particularly given the rebound in ICE prices during the holiday. Every ZCE cotton contract soared late in the week with most reaching life-of-contract highs, and China’s CNCE closed limit-up two sessions in a row, helping justify the gains on the ICE.

Next, an impressive—and largely unanticipated—surge in cotton registrations in India threatens to cap this outlet for forthcoming exports, and may fan the protectionist flames further against additional shipments abroad, driving prices higher. The Indian government’s window for shippers and merchants to register new exports for later shipment is slamming shut just ten days after first opening. Since October 1st, traders already applied for export permits totaling 5.5 million bales, equaling the government’s entire export allocation for the marketing year imposed here. The surge reflects both desperately low inventories in mills across Asia and traders trying to ship as much cotton as possible, as soon as possible, both before the tax-free limit of 5.5 million bales is reached and in case the government restricts exports again. While we demonstrated here that the harvest will easily surpass domestic mills’ needs for the eighth straight year, we do not look for the government to ignore the demands from the local textile industry and raise cotton export limits soon. As we showed here, despite its best of intentions, the government’s meddling in open-market cotton trade to contain domestic prices is backfiring and helping propel both Indian and global cotton prices higher.

Additionally, the USDA added further fuel to the bullish fire in its latest WASDE report. The October balance sheet released late last week here pointed to tighter global fundamentals than earlier anticipated, helping strengthen prices further. In particular, world ending stocks were revised lower from last month’s 45.4 million-bale forecast to 44.7 million. The biggest changes came in China, where anticipated production fell one million bales to 31.5 million. Chinese beginning and ending stocks shrank and forecasted imports climbed. As a result, the world stocks-to-use ratio declined even further from last month’s 37.7% to 37.0%, the lowest in sixteen years, concurring with the highest year-to-date average prices also in sixteen years.

Finally, outside the world of cotton, the U.S. dollar continues to plumb new depths, helping to boost prices for a range of export commodities. The U.S. dollar index fell for the fourth straight week as monetary policy remains exceedingly loose, settling at 77.563 Friday, its lowest close in almost nine months. Friday’s less-than-stellar U.S. employment report exacerbated worries over the U.S. economy. And following the weekend IMF summit that failed to ease tensions over a festering international ‘currency war’, the Federal Reserve is set to provide additional stimuli to the sagging economy, which is likely to weigh on the dollar and boost commodity prices even further.

Weekly Commodity Market Recap: Cotton

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In anticipation of the USDA’s next release in coming days of the latest U.S. cotton supply and demand projections for new-crop cotton, FCStone prepared forecasts and commentary on how these projections may change from recent months:

U.S. production for 2010-2011: Down 300,000 bales to 18.5 million bales. While yields are still likely to be well above last year, crop conditions generally have eased gradually over the last two months across much of the cotton belt, suggesting yields may not be as robust as earlier anticipated. While this trend is happening in several states, we are keeping a close eye on Texas and the Carolinas. Here, the northeastern corner of the cotton belt received well over eight inches of rain last week, drenching open-boll cotton and fading harvest prospects. Also, the condition of the Texas crop still in the field has eroded to the lowest since June, dimming earlier optimism somewhat.

U.S. Exports: Up for the fourth straight month, rising from 15.5 million to 15.7 million bales. Already, early-season commitments stand at a record 8.9 million running bales, hinting at robust exports later this marketing year. Adverse pre-harvest weather in several cotton-growing areas of China was unwelcome and may hinder production and quality, suggesting the world’s largest importer may need to import even more fiber in 2010/11, with much of that coming from the U.S. What’s more, delayed exports from India discussed here also could bode well for shippers in the U.S. and Australia this marketing year.

U.S. Ending Stocks: With a likely smaller anticipated supply and projected demand bigger from last month, ending stock forecasts for October are likely lower by 500,000 bales from September to 2.2 million bales, the lowest level in more than five decades. Unsurprisingly, recent daily closes on The ICE here touched the highest levels in years in response. We look for the USDA to find expectations of higher demand and lower ending stocks will tighten the anticipated stocks-to-use ratio this year to closer to 14%. This would be the tightest ratio since 1994/95—the last time average prices were as high—and supportive of elevated prices well into the winter.

In spite of this increasingly tighter outlook for U.S. cotton fundamentals, we caution that any increase in U.S. prices may not be commensurate with the tightening in the balance sheet, as it has been over recent months. As the graph below demonstrates, the jump in futures prices has outpaced the tightening in the stocks-to-use ratio over the last two months. And October’s anticipated 12% ratio—while tighter than any point in years—still is not tight enough to support average September prices, let alone even higher prices in October. This extrapolation brings with it the pitfalls inherent in any extrapolation; we caution that October prices even could slide modestly lower, despite the tighter outlook for the domestic market.

While the anticipated tighter evolution of domestic fundamentals is impressive, we temper this outlook with a forecast for looser global balance sheet. In particular, we look for the Indian harvest to jump to a record size, on the strength of unprecedented yields. That having been said, it may be a few months before Indian policymakers allow new-crop shipments to resume, suggesting global exports—and world prices—may remain dear through the conclusion of harvest.

Weekly Commodity Market Recap: Cotton

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Futures trading in New York firmed again last week, driving nearby prices to the highest levels in more than fifteen years as near-term supply concerns around the globe remain a dominant issue. At 99.93 cents per pound, Friday’s finish closed out the tenth weekly increase in the last twelve weeks. In fact, earlier in the week futures gapped as high as 103.55 cents before retreating lower to finish the week up 232 points. Backwardation remains endemic in every contract through 2012. The most-active December contract is up an astounding 26 cents—or more than 36%—in just two months, reflecting both a weaker dollar and concern over shorter crops and tight supplies in a number of markets.

First, the dollar continues to sink lower, boosting export-dependent commodity prices. Dollar Index futures tumbled for the fourth time in five weeks last week, crashing through support to 79.599 Friday, the lowest close in six months. Loose, accommodative monetary policies reinforced by Federal Reserve comments again last week are sure to keep the greenback under pressure for the foreseeable future, suggesting firmer cotton prices may rule for some time.

Next, crop prospects in key markets remain tilted in a more pessimistic—rather than optimistic—direction, further supporting the bulls’ position. The latest cotton assessment in the U.S. shows crop conditions are eroding from early this summer, suggesting yield prospects may fade in tandem as we suggested here. In particular, the USDA recently declared topsoil has turned “short or very short” of moisture over a large percentage of the South. Coupled with unwelcome weekend rains over open-boll cotton in much of the area, prospects for yield and quality could dim further, supportive of price.

China’s crop also remains a concern, plagued by late plantings this spring and heavy rains this fall that are delaying the harvest. Evidence here shows every key cotton-growing region in the North China Plain is seeing cumulative precipitation this season much heavier than normal. What’s more, many of these showers have fallen in recent days, when the crop needs dry days and cool nights to reach full potential. Instead, picking is delayed and the crop in the world’s largest producer could be compromised. In response, over the weekend China announced plans to expand its reserve auction by another 400,000 metric tons to 1.0 million tons, in order to ease near-term supplies for local mills. This move did little to ease panic buying, with every ZCE futures contract month surging to life-of-contract highs.

In light of these bullish indicators, the question remains how much of this sentiment is already factored into the market. While calling a top in a runaway bull market like this is a fool’s game, we take caution that any continued tightening in the fundamentals mostly may be priced into the market already. Futures may have further to climb this fall, but we remain wary of the volatility and look for any continued tightening in the fundamentals to have a more muted impact on driving prices higher.

Weekly Commodity Market Recap: Cotton

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Nearby cotton futures surged last week to a fifteen-year high at 97.61 cents/lb, closing up 674 points, the second-biggest weekly leap in more than two and a half years. The latest jump extends a trend witnessed over the last six months, and especially over recent weeks. Friday’s finish closed out the ninth weekly increase in the last eleven weeks. The most-active December contract is up an astounding 25 cents in less than two months, reflecting both a weaker dollar and near-term supply concerns for the crop.

The U.S. Dollar Index retreated late in the week to its lowest since early August and soon could fall to the lowest in more than a year and a half, depending on Fed Reserve actions later this week. While the Fed isn't likely Tuesday to change its assessment of the U.S. economy or indicate a fresh round of asset purchases, there is an outside chance it could engage in a new round of stimulation, which would further weigh on the dollar and could boost export-dependent commodity prices further.

On the supply side, the market continues to fret over inclement weather impacting much of the Indian and Chinese crops. After a late start to the season, India’s monsoon is threatening to overstay its welcome. For fifteen of the last sixteen days, widespread showers across the country have outpaced daily norms, prompting speculation the harvest size may be smaller—or at least later—than forecast if monsoon rains last longer than normal. Already, the Confederation of Indian Textile Industries is calling for the government to delay cotton exports from October to January. Naturally, a postponement from the world’s second-largest exporter could drive global prices higher as importers scramble, but even the threat of more policy meddling is boosting prices.

In China, foul weather similarly is delaying the crop and may whittle back the harvest size. By late last week, only 5% of the nationwide crop was picked, well behind the 13.6% pace averaged over recent years. And cooler, rainy weather last week in key provinces did little to hasten the harvest, increasing the risk that wintry weather could compromise yields and quality in coming weeks. What’s more, daily offtake of reserve auction supplies has expanded to more than 20,000 tons each of the last eight sessions, supporting our view here that these supplies may expire before ample new-crop volumes enter the market. In response, spot and forward prices in China continued to advance. CNCE, ZCE and physical prices posted strong gains, with every ZCE cotton contract climbing to life-of-contract highs.

The tightest global fundamentals in fifteen years are supporting the highest global cotton prices also since the mid-1990s, with little opportunity for supply-side pressures to ease in the months to come. The ‘A’ Index breached $1.00 per pound recently, while Nearby prices in the U.S. also are on the cusp of closing above one dollar for the first time in years. What’s more, looking to the conclusion of the northern hemisphere harvest, crop concerns could materialize in spots other than China and India, further propelling the market higher. So while specs continue to pile into the boat for easy sailing today, it will pay to cast an eye to the horizon in 2011 for any tumultuous waterfalls ahead.

Weekly Commodity Market Recap: Cotton

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The bulls extended their run on the market last week, with support from anticipated tighter fundamentals in several key countries firming the outlook. The most-traded December 2010 contract on the ICE Futures U.S. rose for the seventh time in the last eight weeks, closing Friday at 91.29 cents per pound, the highest in more than two years. Even more impressive, earlier in the week the nearby October contract closed as high as 91.32, a fifteen-year high. Perhaps more significantly, the fact that each of the next ten cotton futures contracts are backwardated all the way until December 2012 shows just how tight world stocks have become, with little relief likely until well into the new marketing year, at the earliest.

The latest USDA WASDE report released Friday morning re-confirmed this tightness in the market. In spite of a bigger harvest forecast, gains in demand projections easily outpaced higher revisions to supply, implying lower stock levels. In fact, expected exports for this marketing year jumped 500,000 bales to 15.5 million, the second-highest volume in history. As a result, the USDA pared back 2010/11 U.S. ending stocks to a scant 2.7 million bales, the lowest level in fifteen years, closely mirroring our forecast here. In turn, expanding demand and lower inventories drove September’s forecasted stocks-to-use ratio lower to just 14.1%, the lowest since the mid-1990s, concurring with the highest domestic prices since the mid-1990s.

While not as dramatic, the net result of changes in the global balance sheet echoes the tighter conditions seen in the U.S., driving world cotton prices even higher. Forecasted ending stocks for this marketing year eased lower from August to just 45.4 million bales, also tightening the projected stocks-to-use ratio to the lowest in fifteen years. Naturally, global cotton prices are up again on the outlook. Already, every forward contract on China’s Zhengzhou Commodity Exchange now stands at a life-of-contract high, and the most-distant July 2011 contract settled Monday at 19,200 yuan/ton ($1.29), a record. Similarly, the ‘A’ Index, a proxy for global cotton prices, breached $1.00 per pound Monday for the first time since 1995, trending in mirror-opposite fashion to the plunge in global fundamentals.

Looking ahead, two opposing issues cloud the medium-term forecast. First, spinners worldwide are complaining that climbing yarn prices have not been commensurate with rocketing cotton costs. Naturally, this implies even tighter margins for many yarn mills that have little margin to spare. In fact, anecdotal reports are emerging of some yarn operations idling spindles and selling their cotton inventories to capitalize on the jump in price, something unsustainable longer-term. But arguing for the bulls, excessive recent rains in key areas of China and India could dampen prospects for yield, quality, or at least timeliness of the pending harvest. While the trend remains our friend, a global textile supply chain already dealing with razor-thin margins will be in no mood to support elevated fiber costs in the long term. Nearer term, while the fundamentals do not support a sustained retracement, we would not be surprised to see prices begin to plateau as the northern hemisphere harvest commences.

Weekly Commodity Market Recap: Cotton

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The cotton market remains in a world all its own, shrugging off this year’s tepid performance in the broader commodity complex and soaring to the highest levels in years. ICE cotton futures last week closed up for the eighth time in the last nine weeks, breaching 90 cents per pound to finish Friday at the highest close in fifteen years. Hints at increased Chinese demand for foreign cotton, a weaker U.S. dollar, and projected tighter domestic fundamentals are helping spur prices even higher, with little opportunity for a major retrenchment on the horizon.

First, sentiment is spreading that Chinese mills may boost cotton imports in coming months, as unseasonably cool temperatures and rain dampen prospects for crop quality and output. Already, the USDA is pegging imports into China—the world’s largest mill consumer and importer—at 12.5 million bales this marketing year, the second-highest level on record. Now, late-season precipitation on open-boll cotton in key provinces may erode harvest projections, causing mills hungry for the fiber to look abroad for supplies, adding more pressure to global prices. What’s more, evidence here suggests the government’s reserve auction supplies may be depleted by early October, before abundant new-crop supplies arrive on the market. The initial 600,000 metric-ton auction has dwindled by half over the last few weeks, hinting at a squeeze on near-term supplies in coming weeks before recently harvested cotton arrives on the market later this autumn.

Next, the weaker dollar also is helping propel cotton prices higher, auguring well for the export outlook this marketing year. The greenback continues to plumb a fifteen-year low against Japan’s yen, easing importers' cost of dollar-denominated cotton. Already, export commitments are at record highs for this point in the marketing year, with widespread demand up from several key U.S. markets. At 15.0 million bales, the USDA export target for 2010/11 is up 1.5 million bales from earlier this spring. Even so, we continue to find this forecast too conservative and look for it to climb further in coming months, boding well for higher prices.

Last, in spite of the dramatic tightening of U.S. cotton fundamentals over the last year and a half, we look for the market to tighten even further, supporting elevated prices. In our latest analysis here of how the USDA may adjust its September forecasts, we anticipate the demand side of the U.S. balance sheet may expand further, with both projected exports and mill use likely to rise. As a result, ending stocks for this marketing year may decline, pushing the stocks-to-use ratio even lower to the tightest level in fifteen years, fundamentally supporting the highest prices also in fifteen years.

What’s more, other signals support the bulls’ argument. Trend-following funds last week raised their net-long cotton futures/options position to the largest since March 2008. And the latest cotton on call position report discussed here shows record-high unfixed call sales helping drive futures higher. Amid all this bullishness, the contrarian in us points to widespread overbought technical indicators that are calling for a correction. But woe be the market watcher—or participant—that calls a top and risks being gored on a runaway bull market.

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.