The week ending Friday, January 15 saw ICE cotton futures stair-step higher to the week’s highs on Wednesday, before downshifting a little and gyrating sideways (see graph above courtesy of Barchart.com). Possible influences continue to include Chinese cotton markets, which gyrated sideways this week, very bullish U.S. supply and demand numbers, continued surging grain prices, supportive outside U.S. financial markets (including a post-bottoming U.S. dollar), and trend-following speculation. The most-active Mar’21 settled Friday at 80.70 cents per pound, up a cent from the previous Friday’s settlement.
Open interest in ICE cotton futures rose all week along with the higher/mixed price settlements, suggesting more new buying. However, the January 12 snapshot of speculative open interest actually showed a small decline in the hedge fund net long position.
Cotton-specific fundamental factors this week included stronger export sales (through January 7) despite the recent surge in prices. The U.S. balance sheet was notably tightened by the January WASDE numbers, justifying the old crop rally and forecasting strong new crop prices. Certified stocks appear to have bottomed following the decline since November.
In the near term, ICE cotton futures have found new strength on speculative buying, and apparently recovering foreign demand, backstopped by Chinese Reserve buying. There is also at theory of increased Chinese mill buying in response to 1) available import quota, 2) restrictions on Chinese sourcing of Australian cotton, and 3) potential impacts from sanctioning cotton exports from Xinjiang. But these latter influences remain to be seen.
The long term implications of USDA’s 2020/21 balance sheet are still bearish. The longer term damage to cotton consumption by the COVOD-19 pandemic will surely take many months or years to resolve. I think that the normalization of cotton’s global supply chain and consumers’ willingness to buy more apparel may til Christmas of 2021.