We again enter a cotton market that is being influenced more by outside events (bringing more volatility), rather than any fundamental news regarding cotton. However, the market may stabalise a touch with the forthcoming WASDE report this Tuesday. 

What are the outside events that are bullish for prices on cotton? 

• Crude Oil has passed $70 / barrel, and might be on for $80 after OPEC left output largely unchanged and with the attacks over the weekend on Saudi Arabian Oil Facilities. Higher oil prices can lead to more inflation which may give a push to all commodities. 
• The $1.9 billion stimulus support with all Americans eligible to receive cheques of $1400. 
• China’s exports surged 155% in February, with imports gaining 17%. A strong china often leads to a stronger commodities environment. 
• The US added 380k jobs over the course of February, signaling a fast recovering economy as some states start to come out of COVID related restrictions.

However, the most negative outside event across all markets over the last week has been the increasing treasury yields that have spooked investors and provoked sell offs in the stock and commodity markets. FED chairman Jerome Powell admitted last week that inflation was likely to rise but that for now they would keep interest rates unchanged. Inflationary pressure will almost certainly trigger higher commodity prices. 

One look at the imports into Bangladesh over February tells us that Indian cotton is the flavor of the month, not just in Bangladesh but in all markets. Pakistan is once again considering allowing Indian cotton into the country with a rumour circulating that the Pakistan government may allow up to 1 million bales of Indian into the country. Indian can be bought at huge discounts to competing origins which must be of concern to those merchants that have large quantities of cotton in transshipment ports and are having to compete with nearby Indian shipments. For now merchants are holding relatively firm on their basis. 

Currently in India total arrivals are close to 28 million bales, targeted exports at 5.5 million bales and local consumption at 32 million bales. The situation is getting tight there and it is no wonder that the textile mills are putting pressure on the government to cancel the import tax on cotton. Higher grade and longer staple cotton might be required by May. 

Attention this week will turn to the WASDE on Tuesday. Expectations are for a lower current and new crop US. For current crop US, 14 million bales have so far been classed and historically this number might only increase by 100k bales come the end of the season. It therefore seems likely that the current crop US production figure will be lowered. New crop US is not being helped by continued drought conditions, especially in Texas, so we could see a lowering in this production too. Meanwhile, consumption of US has remained steady throughout the market volatility of the last few weeks, therefore a reduction in exports or consumption seems unlikely at this stage. 

We should also point out the rocketing prices of inputs. Demand of all fertilizers has increased as agricultural producers look to plant as much as they can in order to take advantage of higher prices. High input prices are of concern to producers, especially if the market was to fall they would be left with high production costs and lower returns. 

The question over the last few weeks has been whether the recent correction is long term or just a blip on the way up to higher values. Fundamentally we feel that cotton remains strong, if not stronger that where we were a month ago. In addition, we have the stimulus package and the printing of money that should again find its way into commodities markets. Speculators have been shaken these last couple of weeks and have taken some of their long bets off the table. However, we still believe this is just a correction to higher values on ICE.