In an article dated January 17, 2024, Barchart contemplated whether the dismal performance of cotton in 2023 would transform into a triumph in 2024. The article highlighted that historical price peaks for cotton have typically occurred from March through June, attributing the season as a period of the highest uncertainty surrounding the global annual cotton crop which directly influences annual supplies. Additionally, it suggested that the worst-performing sector member in one year tends to become the best-performing member in the following year. This observation underscored the anticipation that the first half of 2024 would likely witness significant price movement, given the seasonal nature of the soft commodity.
On January 17, nearby ICE March cotton futures were trading at 81.81 cents per pound, following a 2.84% loss in 2023, closing at 81 cents per pound. Subsequently, cotton prices inched higher in the early days of 2024, with the rally persisting throughout January and the initial half of February.
Cotton rallies in 2024
Nearby ICE cotton futures experienced an upsurge of nearly 13 cents in mid-February as compared to the closing level in 2023.
The chart vividly depicts the surge in nearby ICE cotton futures, which climbed 18.4% from the 2023 year-end price of 81 cents to a high of 95.93 cents on February 16.
Approaching the next technical resistance level
Having already surpassed the initial resistance level of 90.75 cents, the ICE cotton futures are now eyeing the next upside target of 96.14 cents, corresponding to the peak in October 2022. This upward trajectory marks the commencement of a bullish trend in early 2024, with a breakthrough above 96.14 cents potentially triggering a rally that could challenge the $1 benchmark, a level not breached since September 2022.
The most bullish months are ahead- Crop uncertainty supports prices in spring
Undoubtedly, the uncertainty of the 2024 crop is expected to fuel the ongoing uptrend in cotton futures over the forthcoming weeks and months. A twenty-year chart indicates that cotton futures typically attain seasonal highs during the annual planting season, coinciding with the peak uncertainty surrounding the yearly crop. Furthermore, the forward curve for cotton shows slightly higher prices for May and July 2024 delivery, underscoring the seasonal strength of this soft commodity. Moreover, the USDA’s February World Agricultural Supply and Demand Estimates Report corroborated the bullish trend by revealing lower U.S. ending stocks, higher exports, and unchanged production, alongside reduced global ending stocks and output, fortifying the upbeat outlook for cotton prices.
Furthermore, as cotton prices surge, other ICE soft commodities futures have been experiencing their own bullish trajectories. From cocoa to coffee, and from sugar to frozen concentrated orange juice, these commodities have been on a tear, with cocoa, in particular, skyrocketing to record highs in February 2024. It is notable that while soft commodities emerged as the top-performing raw materials asset class sector in 2023, with a composite gain of 24.04%, cotton stood out as the sole soft commodity that trended lower, plummeting 2.84% over the year. However, in early 2024, cotton has staged an impressive comeback, steadily rallying from the November 2023 low below 75 cents per pound, closing the gap with its peers.
No ETF or ETN products- Futures are the only route
Regrettably, there are no ETF or ETN products tracking cotton futures following the delisting of the BAL ETN product in 2023. Consequently, the sole avenue for a risk position in the cotton market remains through ICE futures and futures options. Futures necessitate both original and maintenance margins, creating substantial leverage. With a cotton futures contract containing 50,000 pounds of fiber valued at $47,000 at 94 cents per pound, the original margin of $3,300 enables market participants to control $46,000 of cotton for a 7% down payment. Moreover, a maintenance margin of $3,000 per contract mandates daily settlements for longs and shorts when the margin level fails to cover market differences.
The short-term outlook for cotton is bullish, buttressed by the latest WASDE report, seasonal patterns, and the broader price action in the soft commodities space. Evidently, an early spring has arrived in the cotton futures arena. Moreover, if the price breaches the 96.14 cents per pound technical resistance level, cotton prices could soar, potentially slicing through the $1 mark as effortlessly as a hot knife through butter.
More Softs News from Barchart
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
