After a period of virtually uninterrupted strengthening since early September, cotton prices moved largely sideways throughout December and faced a correction in early January, dropping 2.74 cents/lb on January 5 before finding support just above 72.00 cents/lb.  In more recent trading, cotton prices have rallied and regained about half of the losses incurred in early January.  The sideways movement in NY prices in December coincided with significant strengthening in the dollar (futures contracts based on the dollar’s value were up more than 4% in December).  Cotton prices have had a strong inverse correlation with the dollar since the onset of the credit crisis in September 2008, meaning that cotton prices have tended to fall when the dollar rises and that cotton prices have tended to rise when dollar falls. The fact that cotton prices in December were relatively flat while the dollar climbed in value represents the first major deviation from the dollar/cotton correlation since the credit crisis.  Also defying the correlation between the dollar and cotton prices was the A Index, which climbed throughout much of December and rose from levels around 75.00 cents/lb to 79.85 cents/lb before retreating back to levels near 78.00 cents/lb in early January.

The latest USDA report describes few changes from last month’s figures.  Globally, production estimates decreased only 6,000 bales.  There were, however, some significant changes at the country level.  Production estimates for both China (+500,000 bales) and Brazil (+150,000) increased while production estimates for India (-300,000) and the U.S. (-191,000) decreased.  World consumption figures changed only 145,000 bales with the sole notable declines being for Japan (-90,000) and Russia (-50,000).  Revisions to trade estimates were also minor, despite the official announcement last month from China regarding the allocation of import quota.  The world export figure decreased only 215,000 bales with a 200,000 reduction in the Indian figure being the largest country-level revision.  The Chinese announcement had no apparent effect on USDA trade figures.  It included both the 4.1 million bales (894,000 metric tons) at the one percent tariff mandated by China’s accession to the WTO as well as another 4.6 million bales (1 million metric tons) that will be permitted entry at sliding-scale tariff rates.  According to reports, much of the sliding scale portion of the allocation is to be designated for the “processing trade”, meaning that cotton allowed entry under these rules will only be allowed for use in the production of textile products destined for export.  There is speculation that China may issue additional import quota later in the year.

Given the small revisions to supply and demand figures, estimated ending stocks changed only slightly, falling 88,000 bales worldwide and leaving January’s stocks-to-use ratio unchanged from December’s level at 45.2%.  With the stocks-to-use ratio at its lowest value in 15 years, fundamental pressures are likely to continue to support prices in coming months.  Nonetheless, there are some potential mitigating factors that could limit further price advance.  One such factor could be further strengthening of the dollar.  Other upcoming events that could affect prices are acreage reports due to be released in February by the National Cotton Council and the USDA.  Given higher cotton prices, expectations are that these reports will describe increases in both U.S. and world acreage for 2010/11.  Considering the 9.2 million bale reduction in ending stocks described in current USDA estimates, the magnitude of any acreage increase would have to be large to move projections for 2010/11 stock-to-use ratios significantly higher and provide any downward influence on prices.