Cotton prices get to a 2-year high amid supply woes

By: Faith Maina
Faith Maina
Faith strives to break down complex developments so investors can make better informed decisions. When Faith is not immersed… read more.
on Jan 7, 2021
  • Cotton prices are at a 2-year high, while facing resistance at the psychological level of $80.
  • The market is still reacting to the US ban on Chinese cotton and cotton products.
  • Unfavorable weather in key cotton-growing areas in the US has triggered supply woes.

Cotton prices are at a 2-year high. The commodity’s futures have largely been in the green for over 2 weeks now. On Tuesday, it hit its highest price since December 2018. Since then, it has been finding resistance around the psychological level of $80. The rallying is the market’s reaction to the US ban on imported cotton products from China. Besides, the unfavourable weather in key cotton-growing areas within the US has impacted the commodity’s supply.   

cotton prices

Unfavourable weather in key cotton-growing areas within the US

Several key cotton-growing regions have been experiencing harsh weather conditions; an aspect that has favoured cotton prices. Texas, the major cotton-producing state in the US, is one of the affected regions.

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While speaking to The Wall Street Journal, one of the farmers in the region noted that drought has resulted in his yields declining by a third. He stated, “We’ve been in a bad cycle here for several years now.” In other parts of the state, the Hurricane Hanna experienced around July 2020 led to heavy floods that affected the cotton crop.  

The US Department of Agriculture (USDA) has predicted that the current domestic crop will be the lowest in 5 years. In its December WASDE report, the agency lowered its US production outlook by 1.1 million bales. The adjustment resulted from Texas’ reduced output by 900,000 bales.  

US bans Chinese cotton

Cotton prices are further reacting to the decision by Trump’s administration to ban cotton-related imports from China. In December, the US government made the move to prohibit the purchase of cotton and its products from a major Chinese exporter. The announcement was the country’s approach to condemn the allegations of human rights violations in Xinjiang.

Notably, the region accounts for about 85% of China’s cotton production. At the global level, China exports around 40% of the textiles consumed worldwide. Besides, its clothing exports are about 30% of the global consumption.

For those whose interest is to invest in commodities like cotton, the law is another blow to the textile industry. Participants in this sector have largely been affected by the coronavirus pandemic. The vaccine rollout increased their hopes of a better business environment in the new year. As such, the ban on Chinese imports has heightened supply woes; resulting in the rise of cotton prices.      

Cotton prices’ technical outlook

Cotton prices are finding resistance around the psychological price level of $80. Currently, the cotton futures are trading above the 20-day and 50-day exponential moving averages. From this perspective, the prices may break out on the upside in the short-term. However, I predict that the uptrend will soon reverse downwards. Its current RSI is 74.77. The figure is an indication that the commodity’s futures are headed to the overbought territory. A further rise in cotton prices will prompt investors to take profit; resulting in a downtrend.  

cotton prices
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