Feel free to contact Andy Ryan by email if you would like to learn more about his analysis of the cotton markets.
June 30, 2010
Cotton prices fell again today, spurred by weakness in outside markets and a larger than expected acreage number from the USDA. While the stock market continued to struggle, commodities were mixed. Soybeans fell over 1% after opening strong. Corn, however, was an absolute all-star today, surging 8.5% while wheat jumped about 4.4%. Benchmark energy contracts were generally lower, lead by heating oil, which fell almost 2% today.
Cotton prices in China today were mixed to lower. On the ZCE, the Sep ’10 contract touched a record high at 18,390 yuan/ton on good overall volume of 349,642 contracts. However, prices for the new-crop Jan ‘11 contract fell 30 yuan to settle at 16,800 yuan/ton. Open interest expanded 15,094 contracts. On the CNCE forward market, prices fell 4 to 93 yuan/ton on better than average volume of 18,680 tons. Spinners report yarn sales remain robust, as do downstream sales of fabric. More hail in Kashi and Shawan counties of Xinjiang damaged several thousand hectares of cotton there. The CNCotton ‘B’ Index (T328) rose 41 to 18,210 yuan/ton.
In Pakistan, the textile sector is still struggling with yarn export restrictions from the government. According to sources there, many more spinning mills have shuttered their operations, as there is no domestic market for their high-quality yarns. These mills are holding yarn stocks with the promise to export them to customers after the export restrictions are lifted on July 26th.
In India, concern is mounting in Haryana and Punjab about stress to the crop. Concern has now spread to Maharashtra, the second largest cotton producer after Gujarat about lagging monsoon rains. Almost 4.4 million hectares of land is ready for sowing in this state, but only 1.3 million hectares has been sown so far due to reduced rainfall. Maharashtra contributes approximately 22% of India’s total cotton production and over 65% of its cotton area is rain-grown.
The outflow of fund money from cotton along with the pressure of a growing new crop has been too much for cotton to handle lately. Despite all the incredible demand and lack of supply, cotton is struggling mightily. Spinners continue to fix purchases basis December, but the volume has been easily overwhelmed. As we have been mentioning recently, when everything seems very bullish, but the market can’t keep moving higher, it’s time to worry. The predicted balance sheet tightness for a year from now is an issue that is simply down the road. Between here and there are big U.S. and world crops that will need to be digested at a time when cotton is off the speculators’ radar.
USDA Boosts Planting Forecast 19% from 2009; Biggest Acreage in Four Years
In today’s much-anticipated report on revised estimates of crop plantings across the United States, the USDA increased its forecast for planted U.S. cotton acres to the highest level in four years, hinting at a larger-than-expected harvest this fall. 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.
Across the Cotton Belt, cotton plantings are likely to rise in every state but Louisiana, with most states seeing impressive double-digit jumps. Pima plantings are likely to soar 47.8% to 209,000 acres, in response to near-record Pima prices in the U.S. in recent months, while Upland acres are projected 18.8% higher. The biggest relative gains are expected to occur across most of the Mid-South and Southeast, and in California.
The revision is impressive not only in its increase from last year’s crop size, but also in its increase from March projections for the new crop. Today’s forecast is up 400,000 acres—or 3.8%—from the USDA prospective plantings forecast just three months ago. In fact, today’s 3.8% jump in acreage marks the biggest percentage increase from the earlier prospective plantings forecast in over fifteen years. We find this curious, given no dramatic change in relative prices since March between cotton and other competitor crops, and no dramatic deviation in seasonal weather norms across much of the Belt since March to denote a shift in plantings from one crop to another. Regardless, assuming ten-year averages for abandonment and yield, this season’s cotton crop could rebound to almost 16.0 million bales, the biggest harvest in three years. Should yields climb higher than this average as we have often discussed, the 2010/11 harvest size realistically could jump by almost half from the smallest crop in a quarter century picked in 2009/10, helping ease domestic supply-side pressures in the new marketing year.
Technical Commentary
The technical situation for December continues to deteriorate. The warning signals to the bulls are now loud and clear, as the market approaches long-term trend support at 75.50. Short-term moving averages are still rolling over and now appear poised to cross down under the medium and long-term moving averages. Price, however, has already fallen below all major moving averages, except the 200-day average just under 75.00. Momentum oscillators are still pointing lower and not yet oversold. Also, we mentioned yesterday the “toppy” appearance of the December weekly chart, which now looks to have firm confirmation unless prices rally back to the highs by Friday close (not likely).
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