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Volatility Returns to Cotton Market

By John Johnson

The U.S. Department of Agriculture provided fireworks for the cotton market on July 12 that would have rivaled those during the Independence Day celebration the previous week. Immediately after the department released its monthly supply and demand reports, cotton futures at the Intercontinental Exchange in New York exploded to the upside as speculative buying surged. The October, December, March, May, and July futures contracts settled limit-up that day with December settling at 70.78 cents per pound. For the five trading sessions ended July 14, December cotton gained a total of 872 points with 700 points coming in less than 24 hours.

Changes in USDA’s estimates for China, specifically domestic cotton consumption, provided the ignition that set the futures market on fire. Chinese beginning stocks were lowered 1.5 million bales from 62.3 million to 60.8 million bales, and consumption was raised 1.5 million bales for 2016-17. Overall, however, the reports were a bit confusing for some analysts as USDA raised its estimate for 2016-17 U.S. production by one million bales to 15.8 million and raised its estimate for

U.S. exports by one million bales to 11.5 million. Traders also noted the department cut its estimate for Pakistan’s production by one million bales and lowered its estimate of the Indian crop by 500,000 bales.

Ahead of the July supply and demand reports, cotton futures prices had been locked in a tight trading range for several weeks amid uncertainty on several fronts. Most of the uncertainty stemmed from negative macroeconomic signals in the United States and elsewhere. These included disappointing jobs figures and declining orders for business equipment in the United States. Most of all, though, were global equity and financial market jitters leading up to Great Britain’s vote to stay in or leave the European Union.

The vote was held on June 23, and by a margin of 52 percent to 48 percent, Britons chose to leave the EU, raising fears about the impact on Britain’s financial services industry and the possibility Europe could be pushed back into recession. The following day, equity and commodity markets fell significantly, and British and European bank shares tumbled more than 13 percent.

The vote results sent the dollar higher and cotton futures lower on June 24. Contracts at the Intercontinental Exchange in New York spent the majority of the session on negative ground. December cotton traded from a low of 63.83 cents per pound to a high of 65.43 but eventually settled 100 points lower at 64.42.

On a positive note, cotton prices had received some support from concerns about the cotton crops in China, India and Pakistan. The estimate for China’s 2016-17 production was reduced by 1.0 million bales to 21.5 million, according to USDA’s June supply and demand reports. Other reports noted a “modest decrease” in cotton’s planted area in India, and Pakistan’s area under cotton cultivation was expected to fall short of the target by 5 to 10 percent. In another interesting development, India was importing cotton from Pakistan due to rising local prices resulting from tightening supplies.

Export sales of U.S. cotton have remained positive. Total commitments for the 2015-16 season had risen to almost 9.9 million bales as of July 14, and export shipments stood at almost 8.6 million bales.

Virtually all the crop in Texas, Oklahoma and Kansas was in good condition in mid-July, although some producers on the Texas High Plains had to replant following heavy rains and large hail.

In other news, sales from China’s reserves have continued at a steady pace since early May with virtually all cotton offered each day being taken. The daily auctions are expected to continue through late August.

Volatility in the cotton market may continue until the next supply and demand estimates from USDA are released on August 12. Traders and analysts will be watching for any revisions from the July estimates. Some question the 11.5 million-bale-estimate for U.S. exports because China is not expected to import a sizeable volume of U.S. cotton in the coming season. Analysts also caution that speculators that have supported the recent rally in cotton futures can turn on a dime and become sellers which would only add to the current volatility.