Fitch Solutions hiked its forecast for cotton prices, citing weakened output expectations at a time of buoyant consumption, which could even lift values above 100 cents a pound for the first time in a decade.
The analysis group lifted by 17 points to 87 cents a pound its forecast for average New York cotton futures prices in 2021, on a nearest-but-one contract basis.
That itself would be the “highest level since 2011”, Fitch said, saying it saw prices “remaining elevated in the coming quarters as supply is tight amid the robust Covid-19 economic recovery and strong pick-up in demand in 2021”.
Values could even touch 100 cents a pound – or exceed it, if they manage to breach the “strong resistance” at this level, which has not been touched on a nearest-but-one contract basis since November 2011.
“Our current base case is for cotton prices to remain below the 100 cents-a-pound mark in the coming months, as it represents a key multi-year resistance,” Fitch said.
However, a “very quick pick-up in textile demand, coupled with potentials for shipping constrains as economic activity recovers strongly across sectors, and a deterioration in the 2021-22 crop outlook (leading to a second consecutive year of low crop) could send prices above this level”.
Fitch also highlighted a “clean break” by futures through the 100 cents-a-pound level as being “bullish” for values, with such a move through a key price point likely to be seen by many investors as a sign of elevated appetite for higher prices.
‘Spec liquidation responsible’
The comments come amid some pressure on New York cotton futures, with the nearest-but-one July lot slumping limit down last Tuesday, after the US Department of Agriculture, in its monthly Wasde report on world ag supply and demand, cut its forecast for US stocks of the fibre by less than investors had expected.
The decline was seen as encouraging some further selling among speculators, with Tobin Gorey at Commonwealth Bank of Australia noting that” cotton’s momentum continues to wane, presaging continued selling by some investors in the near term”.
“Data certainly suggest that spec liquidation has been responsible for the market’s retreat,” said Louis Rose at Rose Commodity Group.
In the week to last Tuesday, managed money cut its net long in New York cotton futures and options by 8,200 lots, the biggest selldown in a year.
‘Confirms the tightness’
However, futures have managed some recovery from last Tuesday’s lows, with the July lot standing at 87.72 cents a pound, helped by ideas of weaker prices encouraging demand which many see the US as lacking sufficient supplies to meet.
The pace of US cotton shipments “continues to be substantially above the 290,000-bale pace needed to make the current USDA estimate of 15.5m bales [for the full 2020-21], which is why most analysts expect exports to reach at least 16.0m bales,” said Plexus Cotton.
The merchant added that data on warehouse receipts, issued to producers or traders lodging cotton at specified stores, “confirms the tightness in the US”, with volumes down 30% year on year to 8.19m bales as of late last week.
Many commentators have too flagged the enthusiasm among buyers to gain coverage, through options, of cotton for price levels well above those futures are trading at.
The largest open interest, as of Friday, for any cotton options contract is the 3,677 lots live in the July call lot with a strike price of 110 cents a pound, exchange data show.
July calls at 100 and 105 cents also have also attracted substantial open interest, of 2,847 and 2,498 contracts respectively for July.
For May call options, the strike price of 110 cents a pound holds the largest open interest, of 2,386 lots.
Fitch said that its upgrade to its price forecast reflected in part a trim of 700,000 tonnes to 118.0m tonnes in its forecast for world cotton output in 2020-21, cutting estimates for production in Brazil, India and the US.
However, the group too raised its forecast for global consumption by 1.7m bales to 118.9m bales – putting the world supply and demand balance into a deficit for the season.
“Cotton consumption will rebound by a strong 13.0% in 2021 following the 14.5% drop recorded in 2020 due to Covid-19,” Fitch said.
And demand will “continue on a recovery trend in 2022, when we see it reaching pre-pandemic levels”, reaching 123.9m bales.
That would leave only marginally behind output, seen boosted by expectations of “more normal weather” helping recoveries in the like of India and the US.
“We see the global market shifting into a deficit in 2021 and remaining tight in 2022,” Fitch said.