The week ending Friday, December 4 saw ICE Mar’21 cotton futures slide most of the week until making a small bounce on Friday (see graph above courtesy of Barchart.com). Mar’21 settled on Friday at 71.57 cents per pound. Open interest eroded all week, suggesting the possibility of a little long liquidation through Thursday.
The November 14 snapshot of speculative open interest did in fact show almost 2,000 contracts of hedge fund long liquidation, offset by a very small amount of short covering, lowering the hedge fund net long position over 1,700 contracts, down to early October levels, i.e., when futures were 66~68 cents. The index fund net long position also decreased week-over-week by roughly 2,000 contracts. The U.S. dollar slid to 2.5 year lows in the opposite direction of record stock prices.
Fundamental factors this week included harvest progress, decent enough export sales (through November 27) in the wake of 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 flat-to-lower 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.)