The market again saw strong momentum finishing at 90.48 on the May contract, up 182 points in the week 

We had reported that a bullish sentiment has prevailed in cotton and in commodities in general, but what are the key factors driving this: 

• The world economies recovery post covid, most notably China which reported a 2.3% GDP growth in 2020. As a result their consumption of commodities have soared. The US economy is expected to recover at a similar rate in 2021. 
• Vaccine based optimism, which will only increase as vaccine roll outs are speeding up globally. 
• Inflationary pressure has kept investors on their toes and pushed them to look at commodities, which traditionally see higher prices in inflation environments. 
• The US crop suffered a cut to production, whilst exports remained strong helping fuel ICE.

The question in all of this will be, for how long will this commodity boom last? Will China remain a strong buyer of commodities? Will governments allow inflation to take hold? Janet Yellen, the US Treasury Secretary said last week that they have tools at their disposal to control inflation (not stating that they could fully avoid it) and they shall no doubt use them. She also stated that for now the tariffs on China shall remain in place, signaling their intent to maintain a strong grip on China. 

To a certain extent, understanding the above questions raised will allow us to understand future direction of pricing on ICE, but for now the commodities bull swing continues with very little seller’s in the market to stop its rise. 

It had been reported that at some point sales of US cotton would have to slow down and that occurred this week. Despite the large carryover the crop is only 15 million bales with total commitments at 14.5 million bales and 8 million bales shipped, current commitments are at their highest level in the marketing year since 2010. It is therefore expected that future US sales reports will be similarly subdued. 

We have seen relatively broad based demand over the course of the week, notably in Pakistan and Bangladesh, although at pricing that is not always at market level. Mills are being asked to pay close to $1/lb for high grade cotton an unimaginable price just a few months ago in such an environment. As a result we are seeing a handful of merchants cut basis levels in order to lighten positions, and this basis erosion should continue if the market were to head higher. 

The spread between the July/Dec contract has now gone out to 6 c/lb. The USDA forecast for US 2021/2022 Cropis currently at 17.5 million bales, up around 2.5 million bales. Brazil cotton crop for 2021/2022 is forecast at 12 million bales. The weight of cotton to be hedged against the December contract is notably high and therefore we could see this spread between the July and Dec continue to widen. That said, it is still very early days for the US crop and a lot can change, especially as Texas is experiencing very dry weather. We may see a similar scenario to what occurred this year where a relatively large crop is reported but this is slowly reduced as the year progresses. 

For now the market remains friendly on ICE, a move to the mid 90’s over the next few weeks is perhaps becoming more obvious. Whether mills are willing to follow this move up shall wait to be seen.