Cotton: Has Spring Come Early?

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In a January 17, 2024, Barchart article, I asked, “Will the 2023 loser be the 2024 soft commodity winner? In that piece, I wrote:

Price peaks in 1995, 2008, 2011, 2014, 2018, and 2022 occurred from March through June. Spring is the time of the highest uncertainty over the worldwide annual cotton crop that determines annual supplies. 

Another factor that favors higher cotton prices is that the worst-performing sector member for one year often tends to be the best-performing member the following year. Keep an eye on cotton, as the first half of 2024 will likely be the time when the price moves, given the soft commodity’s seasonal nature.  

On January 17, nearby ICE March cotton futures were at 81.81 cents per pound after posting a 2.84% loss in 2023 and closing at 81 cents per pound. Cotton edged higher over the first days of 2024, and the rally continued throughout January and the first half of February.

Cotton rallies in 2024

Nearby ICE cotton futures moved nearly 13 cents higher in mid-February than the 2023 closing level.

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As the chart highlights, nearby ICE cotton futures rose 18.4% from 81 cents at the end of 2023 to a 95.93-cent high on February 16. 

Approaching the next technical resistance level

ICE cotton futures have already eclipsed the first 90.75 cents resistance level at the September 2023 high. The next upside target is at 96.14, the October 2022 peak. 

Cotton has already entered a bullish trend in early 2024, and a rise above the 96.14 level could ignite a rally that challenges $1, a price the nearby ICE cotton futures have not eclipsed since September 2022. 

The most bullish months are ahead- Crop uncertainty supports prices in spring

The uncertainty of the 2024 crop is a reason for cotton futures to continue their upside price action over the coming weeks and months. 

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The twenty-year chart highlights cotton futures tend to reach seasonal highs during the annual planting season when uncertainty over the yearly crop peaks. 

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 Cotton’s forward curve shows slightly higher prices for May and July 2024 delivery, reflecting the soft commodity’s seasonal strength. 

On February 8, the USDA released its February World Agricultural Supply and Demand Estimates Report, the gold standard for agricultural fundamentals. The USDA told the cotton market that U.S. ending stocks were lower, exports were higher, and production was unchanged. Global ending stocks and output are lower in the February WASDE, which presented an overall bullish picture for cotton prices, validating the recent price trend. 

Softs remain on fire- New record highs in cocoa

Cotton prices reached the highest level since 2011 in spring 2022 before correcting. Meanwhile, the other ICE soft commodities futures have also been on bullish fire over the past years. Arabica coffee futures rose to the highest level since 2011 in early 2022. World sugar futures also rallied to the highest price since 2011 in 2023. Frozen concentrated orange juice futures, the least liquid soft commodities futures market, exploded to a record peak in late 2023. The latest soft commodity to rally, cocoa, is experiencing a parabolic move that took the price above the 1977 $5,379 per ton record high in February 2024 and over the $6,000 level last week. 

Soft commodities were the top-performing raw materials asset class sector in 2023, posting a 24.04% composite gain. Cotton was the only soft commodity that moved lower, falling 2.84% last year. In early 2024, while cocoa is leading the sector on the upside, cotton is catching up as the fiber has steadily rallied since the November 2023 low below 75 cents per pound. 

No ETF or ETN products- Futures are the only route

Unfortunately, no ETF or ETN products track cotton futures after the exchange delisted the BAL ETN product in 2023. Therefore, the only route for a risk position in the cotton market is via the ICE futures and futures options. 

Futures require original and maintenance margins, creating significant leverage. At 94 cents per pound, a cotton futures contract containing 50,000 pounds of fiber has a $47,000 value.  An original margin of $3,300 means a market participant can control $46,000 of cotton for a 7% down payment. A maintenance margin at $3,000 per contract means longs and shorts must settle balances daily when the margin level is not sufficient to cover market differences. 

Cotton’s short-term trend is bullish. The latest WASDE, seasonality, and the overall price action in other soft commodities support a continuation of higher lows and higher highs. Spring has come early to the cotton futures arena, but more gains could be on the horizon as the price closes in on the 96.14 cents per pound technical resistance level. A move above resistance could cause cotton prices to take off on the upside, with the $1 level giving way as a hot knife goes through butter. 

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.