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Cotton futures - will they outperform again in 2016?

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Cotton has proved a surprise outperformer for 2015, amid a poor commodities market, which has seen the CRB index hit 13-year lows in December.

New York cotton futures are up 6% for the year, on a spot contract basis. While hardly a champagne performance in most circumstances, this compares with a drop of 25% in the CRB index.

Cotton was as of mid-December, the only one of the 22 contracts in the Bloomberg Commodity Index to post gains over 2015, although it now looks like being joined by sugar. (Outside the index, the likes of Kuala palm oil and Paris rapeseed have appreciated too.)

Cotton has been helped by the failure of China, following its cotton subsidy shake-up, to release the mountain of the fibre onto the market that some investors had feared, given the huge inventories in store in the country.

Furthermore, relatively low prices (cotton futures tumbled 29% over 2014), besides China's support shake-up, have curbed the crop's popularity with growers. Production is seen down in 2015-16 for a third successive season.

But will these dynamics stick around to support cotton values in 2016? Leading commentators give their views.

Australia & New Zealand Bank

"Risks are building that cotton prices still need to fall further. The dramatic sell-off in crude… has only added to cotton's overvaluation against textile markets.

"We view cotton prices as needing to fall further in 2016 to stimulate consumption, or risk another year when the large backlog of cotton does not fall.

"Cotton's overvaluation against synthetic fibre prices is reminiscent of the 2013-14 period. In late 2013 and ealy 2014, cotton was significantly mispriced and overvalued. By mid-2014, cotton prices had corrected by 25%, helping cotton regain demand.

"The market in 2016 could well be a similar story, although we don't anticipate prices falling by the same magnitude as in 2014.

"Nevertheless, a sustained decline of at least 10% is needed in 2016 to drive cotton mill use at the expense of synthetics."

Citigroup

"World cotton balances are beginning to tighten although global inventories of 106m bales are not far removed from post-World War II peaks. Array

Q1 2016: 63.0 cents per pound

Q2 2016: 63.0 cents per pound

Q3 2016: 63.0 cents per pound

Q4 2016: 63.0 cents per pound

Forecasts for quarter average, spot New York futures contract

"However, the expected decline in stocks-to-use is largely due to a decline in Chinese reserves resulting from new policies to limit cotton imports and sell-off existing stocks.

"Without a supply or demand catalyst the stronger dollar may cap cotton market cheer and keep prices range bound between 60-65 cents a pound.

"Historically, cotton prices have been sensitive to dollar strength and though dollar appreciation should moderate going in to 2016, further appreciation is expected and could keep cotton prices depressed on the back-of falling imports for the world's largest producer, user and sovereign stockpile holder of cotton—China.

"Declining US stocks-to-use and low exchange stocks should keep a floor on prices around 60 cents a pound, but it is hard to justify a strong rally in this market with China out of the import market."

Commerzbank

"As a result of falling production for some years alongside moderately rising demand, the global cotton market is set to show a deficit in 2015-16 for the first time in six years. Array

Q1 2016: 62 cents per pound

Q2 2016: 62 cents per pound

Q3 2016: 64 cents per pound

Q4 2016: 64 cents per pound

Forecasts for quarter average, spot New York futures contract

"Global stocks should therefore drop, although outside China this will only be a very small decline. Starting at a high level – the stocks-to-use ratio is still above 50% even outside China – stocks should fall by only 2%.

"As even the low US crop and the expectation of the first deficit for many years cannot provide tailwinds on a permanent basis, we do not expect this in the next few months and anticipate only a small price rise to 64 cents a pound in the October-to-December quarter of 2016.

"Political factors are also causing uncertainty as the costs of protectionist intervention in cotton production and trade climbed to a record level last season according to analysis by the ICAC."

J Ganes Consulting

"Spring plantings are only a winter away and the trade will become more keenly focused on next season's crops than the final analysis for 2015-16.

"The issue will be not what is the best crop to plant but which is the most tolerable given the depressed state of commodities.

"Cotton tends not to be the winner in this race and plantings could certainly fall yet again if prices stay depressed. The lower the market is driven at this time of year the more likely that farmers will turn a blind eye towards planting cotton and opt for other more lucrative cash crops.

"This won't be evident just yet but should form the base for a [price] rebound back up early in 2016.

"Unless there is a clear signal that China will be unloading the mountain of stocks they have tied up, I don't see justification for cotton prices to keep sinking much more than they have with the bearish news already factored into the market and the possibility of the dollar starting to turn down putting US cotton in a more competitive position but also helping to stimulate use especially if also tied into an improvement in the global economy. "

Louise Rose, Rose Report

"Many producers are starting to work on planting and marketing plans for 2016.

"Some may disagree, but the gurus we share ideas with think the market is telling US growers to be diversified.

"We concur, but do note that our crystal ball shows 5-10 cents per pound potential above current levels in the December 2016 contract.

"Overall, the US Department of Agriculture's latest balance sheets encourage us in our expectation."

Rabobank

"Base case [is} that New York futures move towards 68 cents a pound through the October-to-December quarter of 2016, as oversupplied world cotton stocks become moderately more manageable. Array

Q1 2016: 65 cents per pound

Q2 2016: 67 cents per pound

Q3 2016: 70 cents per pound

Q4 2016: 68 cents per pound

Forecasts for quarter average, spot New York futures contract

"Competitively priced man-made fibres and slow economic growth underpin slack demand, while government price support policies also limit the pace of stock erosion.

"Looking to 2016-17, a 12% [world] area contraction could slow production to 101m bales, taking stocks below 100m bales as a production deficit of some 15m bales evolves.

"US leads acreage cuts… as soybeans and rice buy more acres in the South. In China, 2016-17 area is expected to fall 10% year on year, constraining production to below 23m bales, down from 24.6m bales in 2015-16."

Dr John Robinson, Department of Agricultural Economics, Texas A&M University

"The futures market provides a forecast of what supply, demand, and price conditions might be.

"December 2016 ICE cotton futures have traded between 62-66 cents per pound since January. This is very similar to the futures price levels for the 2015 crop. The markets are not indicating any reason for a big swing in US acreage back to cotton

"The possible exception to that is that we don't have the competitive grain sorghum prices that we saw during 2015, and presumably we won't have the prevented planting that took out several hundred thousand acres of South Texas production in 2015.

"So that might suggest 500,000 acres returning to cotton.

"That still leaves us with a relatively small 9m+ or so planted acres for the US. This, in turn, could set the cotton market up for some summertime volatility."

Societe Generale

"Our economists continue to forecast slower, and below consensus, 2016 GDP growth in the European Union and in China, of 1.6% and 6.0%, respectively, versus the consensus of 1.7% and 6.5%.

Array

Q1 2016: 62.91 cents per pound

Q2 2016: 62.74 cents per pound

Q3 2016: 60.39 cents per pound

Q4 2016: 64.54 cents per pound

Forecasts for quarter average, spot New York futures contract

"In the longer term, the increased use of synthetic fibres in apparel, particularly after the price spikes of 2010 and 2011, has limited cotton consumption demand.

"Even after prices plunged, changing consumer preferences, particularly in developed markets, have boosted demand for these synthetic fibres.

"Barring a structural change in the cotton industry to include a shift back to natural fibres in apparel and/or faster economic growth, global cotton demand is expected to merely rise in step with population growth."

By Agrimoney.com

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