Cotton Surges Friday But Falls Short of Weekly Gain
A flurry of futures trading activity in the last hour of FridayΆs session reminded traders that the cotton market is susceptible to sudden fund positioning, especially during the last weeks of the year.
Alongside a pullback in the U.S. dollar and gains in several other agricultural commodity markets, U.S. cotton futures closed higher Friday. Most of the dayΆs gains were made in one flash of buying just before 1:30 p.m. Eastern. This suggests an inelegant chunk of fund positioning ahead of the lightly-traded week of Christmas, but the rest of the market gamely maintained most of those gains throughout the last hour of trade.
The March 2016 contract led the gains, closing 0.70 higher at 63.69 cents. Calendar spreads tightened across all 2016 contracts, with the May contract only gaining 0.67 Friday to close at 64.46 cents.
The continuous chart traded above last FridayΆs close during the final hour of notably active trade, but cotton ultimately ended with a weekly loss of just 0.02 cents. Daily trading volumes were relatively low throughout the week, and the market stayed inside previously-tested price ranges.
With only eight trading sessions left in the year, index funds will also note that cotton has made a year-over-year gain of over 3 cents. This is a mild performance, but on balance it may be encouraging liquidation of long fund positions to meet fund weighting goals.
Futures open interest fell throughout the week but remained at 189,439 total lots at FridayΆs close, with the March contract maintaining 133,757 lots and the May contract at 30,152 lots of open interest.
This week the western Indian state of Gujarat announced a bonus payment above the Minimum Support Price for cotton farmers that sell directly to the Cotton Corporation of India. Other Indian states may follow suit in a pattern that is seen to have a short-term bullish effect on Asian prices. While this government intervention wonΆt affect the overall stocks-to-use ratio of global cotton, it may artificially stimulate competitive bids in the region and reduce the amount of Indian cotton that comes onto the export market in the near term.
However, the day-to-day price fluctuations in U.S. cotton futures may continue to be driven by outside markets and fund activity as the calendar year draws to a close. The U.S. Dollar Index was down 0.4100 Friday afternoon but up over 1 percent for this historic week when the Fed funds rate was raised. U.S. stock markets fell Friday, but agricultural commodities generally closed the session higher: nearby soybean futures were up over 15 cents, and the nearby coffee contract closed up 0.65. Gold prices rose $14.30 but crude oil was down $0.25 Friday afternoon at $35.70 per barrel.
