Mumbai (Commodities Control)- Firmness in global cotton prices is far from over yet. The ICE Mar cotton contract gained 93 points for the week ended Jan 15, while the benchmark cotton futures has had a dramatic price rally from sub 50 cents in early April 2020 to 82 cents per lb touched last week.
Fundamentally, ICE cotton’s move higher has been largely based on a large cut in the USDA’s official domestic production and carryout projections, strong US weekly export data, strength in corn and soybeans, weak dollar index throughout 2020 and improving demand signals. Fund buying is consistently underpinning price rally too.
Even technical charts echo the bull trend in motion. From a chart perspective the reference range for Cotton No. 1 (ZCE) vs. Cotton No. 2 (ICE) ratio spread in USD/Metric Ton has remained within a 1.20x – 1.90x range for over 16 years.
The spread has recently turned higher from the lower threshold (current reading near 1.30x). This expanding spread between ZCE cotton and ICE cotton indicates robust demand from china. Added to all the bullish factors underpinning international cotton since last year, this one will aid the trend keeping cotton prices firm in near future.
The trend, thus suggests, there is a meaningful potential for the spread to expand to the upside. This simply means that Cotton No. 1 (ZCE) may outperform Cotton No. 2 (ICE), on a relative basis.
So on a relative trade basis, we recommend buying Cotton No. 1 (ZCE) & Sell Cotton No. 2 (ICE).
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