Weekly: ICE Cotton Suffers First Weekly Drop in February Closing Sub 90 Cents; Mkt Sees Some More Correction

During the first three days of the week, May contract gained 321 points while the fibre was nesting at 2.5 years peak; before giving up all the gains to Thursday’s bloodshed. A rise in treasury yields during Thursday’s session, as the 10-year note shot up to 1.6% prompting a ‘risk off’ move in US financial markets, triggered the sharp crack.The May – July spread stood at 88 points vs 73 points last week.

This was the first weekly decline for ICE cotton futures in February, after three consecutive weekly gains.

Last week, the ICE May cotton contract gained 261 points, finishing at 90.48 cents per lb. For the week ended 12th February, NY Cotton extended its northward price rally, as the active May contract of ICE futures settled with over 5.5% of gains. Cotton #2, for the week ended 5th february settled with gains of 210 points.

Meanwhile, ICE cotton futures slipped on Friday as a dip in equity and grain markets spilled over to the natural fiber, but hopes for stronger demand and tighter supplies helped post a ninth straight monthly gain.

Technically, the market was in grave overbought territory given it had just traded a 2 and 1/2 year high.

The ICE cotton contract for May closed at 88.83 cents, down 86 points, July settled at 89.71 cents, down 66 points and December cotton ended at 84.33 cents, down 45 points. May Cotton ended up 699 points for the month and up 1013 points for the year.

Prices dropped 4.3% on Thursday and retreated 6.9% from an over 2-1/2 year peak of 95.60 cents hit on Thursday. On Thursday, commodities as a group held up relatively well, but when soybeans and corn started to reverse down, some speculative longs pulled the plug on cotton as well and this caused prices to cascade lower.

Weighing on sentiment, on Friday, Wall Street's main indexes extended losses as fears of a potential rise in inflation kept U.S. bond yields around one-year highs.

U.S. grain markets too dropped with wheat futures sliding 2.2%, further pressuring cotton prices. Corn and soybean futures also weakened.

It is odd that the deep slash in cotton prices came despite decent export sales numbers. Weekly export sales report from the U.S. Department of Agriculture on Thursday showed net sales of 247,800 running bales (RB) for 2020/2021 with top buyer China picking up 59,500 RB of the total.

Having said so, CFTC data as of 23rd February showed cotton spec traders were 3,886 contracts more net long to 72,454 contracts. That came via new buying and left managed money the most net long since 14th August of 2018. The Open Interest for the latest week stood at 301,974 contracts vs 290, 036 contracts last week.

Experts are of the opinion that with Friday’s closing in red, the weekly chart is likely to paint a more bearish picture and some sell-off is likely to continue. Having said so, they add that underlying bullishness is very much in place. However short term correction is not ruled out, which might take ICE cotton towards the 85-87 cents window.

During the week, analysts and trade exports noted that prices will not enter a bottomless slope considering weather conditions in the U.S producing areas; due to dryness in some regions. With prices of corn, soybeans, sorghum and winter wheat at profitable levels, there is little room for an increase in cotton acres in 2021 and that should, eventually, support prices in the new season.

Pertaining more to cotton, U.S. demand is doing very well in 2020-21 with exports up 19% from a year ago and showing benefit from China’s growing economy.

Another crucial factor into play is inflation. Investors feel that with the lack of Federal Reserve’s intervention, inflation might get out of hand, which should be positive for commodities; seen as an inflation hedge. In that scenario, experts see higher commodity prices over time.

Dealers note that trend-following speculators, with hefty net long positions, continue to support the market on any declines. So it largely depends on speculators' action now, whether they choose to go net short.