Cotton has been among the most disappointing commodities in recent years, as it is currently the worst performing major commodity in 2014. The soft asset has been faced with major headwinds, sinking prices to five year lows. In fact, cotton has seen relatively little momentum since its historic run-up in 2010 and 2011, frustrating traders with long positions in the commodity [for more commodity news and analysis subscribe to our free newsletter].
Cotton Taking a Beating
Despite a bit of momentum early in the year, cotton quickly started a skid that has led to a YTD performance of nearly -25%. Here is what the commodity has done over the last five years, as represented by the Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL):
As is demonstrated above, the last few years have been especially trying for cotton, as supply/demand issues have put major pressure on prices. Supply continues to outdo demand as production exceeds expectations. For the week ended November 6th, the U.S. sold 158,300 bales of cotton to foreign buyers, a massive 88% above its four week average. Analysts were expecting that number to fall between 50,000 and 100,000 bales. Since the season began in August, U.S. cotton sales have jumped 53% year-over-year. As the third largest producer in the world, the U.S.‘s strong season has played a major factor in cotton’s recent dip [see also Commodities in Focus Amid Russia Sanction Battle].
On top of expanded production, demand continues to dry up in key markets like China, with analysts expecting 107.4 million bales of the commodity left over at the end of the season, creating quite a supply glut. What’s more, China continues to purchase the commodity at a high rate, with most of it ending up in storage, creating worry that the oversupply issue will not end anytime soon.
The Future of Cotton
The long-term outlook for cotton seems bleak at the moment, as increased production and drying demand could hold prices at low levels for quite some time. Traders with positions in the fluffy commodity will want to keep their eyes and ears peeled on the production of key markets like China, India, and the U.S. while also surveying how demand is behaving around the world. For the time being, it looks like cotton is set for further losses or at least a horizontal movement in the short term.
Disclosure: No positions at time of writing.