For the week ending Friday, September 18, the most active ICE Dec’20 cotton contract rose sharply on Monday and then eroded for the rest of the week (see graph above courtesy of Barchart.com). Yet, Friday’s settlement of 65.66 cents per pound was about 80 point above the previous Friday. The September 15 snapshot of Commitment of Traders data showed the index funds cutting their long position by almost three thousand contracts. However, the hedge fund net long position increased from over 4,000 covered short positions plus another 2,000+ new outright longs. The latter was predicted in an uptick of open interest along with Monday’s higher settlement.
Fundamental factors this week included continued recovery in weekly crop condition ratings, cooler weather in West Texas, tropical wind and flooding from Hurricane Sally in the southeast, and booming export net sales numbers (corresponding with last week’s 64-65 cent futures range). Commercial U.S. cotton demand remains reportedly slow (see here, pp. 2-5 for an oft-repeated official statement “The COVID-19 Pandemic continues to negatively affect cotton demand and disrupt supply chains.”). Certified stocks continued at the recent low levels. Chinese and world cotton prices were mixed through September 17.
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 to resolve. In the near term, ICE cotton futures keep bouncing off the 65-66 level, on remaining production uncertainty, Chinese state buying, and unprecedented money flows in the financial sector, created by the Federal Reserve. There is also the possibility of commercial buying from Chinese mills in response to 1) newly available import quota, and 2) 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 profitable market price levels may not happen during 2020. (I do see the possibility of higher prices for the ’21 crop, but for bad reasons like La Niña drought.)
From a marketing standpoint, both old crop and new crop cotton prices remain at the low level of the federal program price support. In government-speak, the adjusted world price (AWP) remains below the 52-cent loan rate. This makes for positive loan deficiency payment (LDP) rates for those who sell their cotton in the cash market (being careful to maintain beneficial interest).