The week ending Friday, November 20 saw ICE Mar’21 cotton futures price rise in Monday’s “risk-on” market reaction to covid vaccine news. Prices then gently gyrated down and back between 71 and 72 cents before continuing on into another uptick on Friday (see graph above courtesy of Barchart.com). Mar’21 settled on Friday at 72.96 cents per pound. Open interest eroded all week, suggesting the possibility of a little short covering mixed in with the wrap-up of high volume fund rolling.
The November 14 snapshot of speculative open interest showed a combination of long liquidation and short covering that reduced the hedge fund net long position over a thousand contracts, down to early October levels, i.e., when futures were 66~68 cents. However, the index fund net long position increased by roughly 1,500 contracts. The U.S. dollar gyrated in a down trend this week, under mixed influences of vaccines, increased infections, and the possibility of expanded quarantines.
Fundamental factors this week included unexceptional export sales (through November 12) despite the recent price weakening. Commercial U.S. cotton demand remains reportedly slow (see here for an oft-repeated official statement “The COVID-19 Pandemic continues to negatively affect cotton demand and disrupt supply chains.”). Certified stocks continued to increase with first notice day for the Dec’20 contract looming.
Chinese and world cotton prices were mixed this week.
In my opinion, the cotton market can’t avoid the long term bearish implications of USDA’s 2020/21 balance sheet. The longer term damage to cotton consumption by the COVOD-19 pandemic will surely take many months or years to resolve. In the near term, ICE cotton futures have found new strength on remaining production uncertainty and speculative buying, as well as Chinese state buying. There is also index fund buying, presumably influenced by unprecedented money flows created by the Federal Reserve. There is also the possibility of commercial buying from Chinese mills in response to 1) newly available import quota, 2) restrictions on Chinese sourcing of Australian cotton, and 3) potential impacts from sanctioning cotton exports from Xinjiang. But all that remains to be seen.
I think that the normalization of cotton’s global supply chain and consumers’ willingness to buy more apparel may take a while. Hence a return to sustained profitable market price levels may not happen during 2020. (I do see the possibility of higher prices for the ’21 crop, but partly for bad reasons like La Niña drought.)