Cotton futures opened slightly lower after the Christmas holiday, pushed to fresh lows, but closed materially higher. While not a textbook reversal, cotton followed the US stock market and benchmark WTI Crude Oil higher after Monday’s nasty performance. Not surprising, as cotton has traded closely with the broader markets during decline of recent weeks and months. Fundamentally, we didn’t see a big change in anything within the cotton market which changed over the past 48 hours. Politically, however, there was no additional negative news coming from the government or being tweeted by Trump. The lack of aggressive tweeting about a government shut down was possibly all markets needed to catch their breath and bounce. Whether or not it is just a dead cat remains to be seen. Should the gov’t shutdown come to an end, bears across many markets could find themselves defensive. Until then, its difficult for the trade dispute to capture center stage again.
Within the world of cotton, the fundamentals would seem supportive at the current low prices. Let’s just start by looking at the nearby CTH9-CTK9 spread. On Monday, when the prices were sharply lower, the spread actually moved sharply higher after a new low last Friday. While spread-watching isn’t as popular as it once was, I still believe it is a good signpost for underlying fundamentals. In this case, it is demand. Over the previous weekend a Chinese gov’t entity was inquiring for good volumes of a non-US origin. Additionally, Pakistani mill are now considering replacing local stocks with US bales, in the wake of the recent price decline on the ICE #2. For those readers that don’t understand the importance of US prices at a discount to local Pakistani prices, I can only say that it doesn’t happen that often. The last time it happened in a major way, it signaled an important low for cotton prices. I believe the function of the market during the recent decline, politics aside, was to find a level of fundamental demand.
What little information can be found regarding progress on the trade dispute would seem to indicate things are moving forward. The Chinese have agreed to execute any and all agreements and have already contracted some commodities they need dearly. Further, stimulus packages for the Chinese economy have always been good for commodities, including cotton. While I can’t declare a major low has been made, US cotton is now cheap on the world stage.
by Andy Ryan