Since August, ICE cotton futures have continued to strengthen, and the December contract has climbed to around 65 cents. However, the price increase is not driven by fundamentals, but the result of global monetary policy easing that stimulates the rise of stock markets and futures. As long as money continues to enter major markets, investors will be more cautious about short selling.
The rise in cotton prices is completely contrary to the current global epidemic. Although the unemployment rate in the United States fell below 10% for the first time, the global economic recession is still an ironclad fact, and the second wave of the epidemic in Europe is about to come, and the global economic situation will not improve in a short time.
Another reason why cotton prices are so strong is that U.S. cotton exports to China have not stopped. In fact, it is not necessary for China to import so much cotton. It is mainly to fulfill the first phase of the Sino-U.S. trade agreement. This has given great support to the cotton market.
In the past two months, India’s CCI has actively sold cotton in stock, mainly to cotton merchants. It has sold a total of about 6 million bales of cotton, both old and new, and the current inventory is about 5 million bales. . CCI has raised auction prices and slowed the pace of sales in recent weeks as a large amount of inventory has been digested. Due to very active monsoon rains, production this year is expected to reach 35 million bales.
From the demand side, clothing orders have begun to increase, and retailers have begun to prepare for year-end sales. As yarn production resumes, cotton demand begins to strengthen further, and cotton prices in China, India, Pakistan and other countries continue to rise. The basis of Brazilian cotton has been significantly reduced, and sales are good in all major markets, especially China and Bangladesh. The basis difference of West African cotton has also been reduced a lot, and sales have also improved. If cotton prices continue to rise, the basis in these origins is expected to continue to fall.
In recent weeks, there have been new developments in northern hemisphere cotton production. The area of Mali in West Africa has been greatly reduced. It is expected that the output next year will be less than 100,000 tons, while this year it will be close to 300,000 tons. In a note of concern, persistent rains in Pakistan have caused production to drop to 6.5 million bales, down from the 7.5 million bales forecast a few months ago.
As new cotton gradually comes onto the market, the rise in spot prices in various countries will encounter resistance. In the past week, the price of US cotton in India increased, while prices in China and Pakistan fell slightly. ICE futures have also retreated from recent highs, indicating a lack of momentum for an upward breakout in the short-term market.
Nonetheless, if the Federal Reserve continues to maintain loose monetary policy and launch a new economic stimulus plan, financial markets are prone to another wave of gains. Currently, the U.S. stock market has surged to high enough levels that investors may consider moving to commodities markets.
In addition, there are several things that will affect the trend of ICE futures. The first is the U.S. presidential election in November, the second is Sino-U.S. relations, and the third is the second wave of the COVID-19 epidemic in the world. However, governments seem to be happy to print large amounts of money to avoid economic recession. As long as this continues, commodity futures will follow quantitative easing to bring stimulus to prices.
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