Amid the sea of red in the year-to-date returns of commodities, investors looking to lock in ahead of a rebound might miss one viable candidate: cotton.
While it could be an important gauge of the economy, cotton had a woeful past two years, just like copper. The fiber, used in making everything from textiles to fishing nets, coffee filters, bookbinders — even explosives — suffered a compounded loss of 13% for 2018-2019 despite steady U.S. economic growth.
That accumulated loss in cotton was almost identical to copper’s rounded-out performance in the past two years — despite the red metal actually posting a gain of 5.5% in 2019.
Fundamentals May Suit Those Looking To Be Long Cotton
But for investors looking for long opportunities in commodities amid the mess created by the coronavirus, cotton’s well-founded fundamentals may be something to consider — especially for those who had missed the boat with oil, which rebounded nearly 12% in just 10 days.
At Thursday’s settlement, U.S. cotton futures’ most-active contract, May, settled at 69.11 cents per lb. If the market retains its momentum, cotton could spring back into a gain of 1.6% this month after a 2.3% decline in January. The rebound would also resume the monthly gains in cotton that ran from September through December — the fiber’s longest winning streak in three years.
“If May cotton can close above 70 cents, I’d consider it a very bullish signal,” said Eric Scoles, commodities strategist at RJO Futures in Chicago. “My analysis suggests this market has the potential to make solid gains and could be a great bullish opportunity.”
Investing.com's Daily Techinal Outlook has a bullish call on cotton, terming it a "Strong Buy" with a near-term target of 70.22 cents.
Cotton's price revival is driven by smaller plantings for this year, data shows.
Tighter Supply; Potential Spike In Chinese Demand
According to the Hightower Report, a commodities consultancy and brokerage in Chicago, the National Cotton Council has projected the U.S. 2020/21 cotton planted area at 13 million acres, down from 13.74 million in 2019/20.
The NCC has suggested that using the 5-year average yield with this acreage, the ending-stocks of cotton should come in near 4.5 million bales for the upcoming year versus 5.4 million this year and 4.85 million last year.
“Both supply and demand in this market are supportive of rising prices and we are quickly approaching resistance on the charts,” said Scoles.
Jack Scoville, who follows crop futures for Chicago brokerage Price Futures Group, said cotton prices also jumped Thursday on news that China had approved tariff reductions for the fiber, among other commodities, in an attempt to get its supply chains moving again.
But Scoville was also somewhat apprehensive on how much Chinese demand there could be for cotton now amid the shutdown of whole industries in the world’s second-largest economy.
“Big buying from China could rally the market, but futures have already moved significantly higher in anticipation of any Chinese buying and the actual buying could become anti climatic,” Scoville said in a note.
“The coronavirus has the chance to hurt trade in cotton. Chinese buyers might need less cotton now as factories inside their country were closed for an extended holiday, although all are reopened now.”