Cotton will be “one of the worst performing” agricultural commodities next year, Australia & New Zealand Bank said, warning that the latest drop in oil prices had only enhanced the competitiveness of synthetic fibres.
ANZ recommended a “sell” trade on New York cotton futures, saying that the relative stability of the market over the past two months, after recovering from a dip below 60 cents a pound in September, had lulled investors “into a false sense of security”.
In fact, an increase by hedge funds to a net long position of more than 60,000 contracts in New York cotton futures and options, as revealed by regulatory data on Friday, had only enhanced the prospect for selling pressure once it was unwound.
This net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – was the highest in 19 months, and enhanced the idea of the fibre being “overbought”, the bank said.
Indeed, the buying had helped provide an “attractive entry point” for short bets on cotton, which ANZ forecast “to be one of the worst performing agri commodities in 2016”.
Oil price impact
The bank highlighted “overvaluation” in cotton against synthetic fibres, prices of which have fallen some 30% over the past year to their lowest in 13 years – and with the prospect of further declines to come as the latest fall in crude prices feeds through into values of products such as polyester.
“The latest sell-off in crude oil prices,” which on Monday hit a six-year low of $36.33 a barrel for Brent crude, “will only add to downward pressure on textile prices,” said Paul Deane, the ANZ senior agricultural economist.
“From the October 2015 high, crude oil prices have fallen by 30% – the full repercussions of this will only full flow through into cheaper synthetic fibre prices in the first half of 2016.”
Back to the future?
Mr Deane compared the discount of synthetic fibres to that some two years ago, when “cotton was significantly mispriced and overvalued” and by mid-2014 had tumbled by 25% – setting the stage for higher demand.
“The market in 2016 could well be a similar story, although we don’t anticipate prices falling by the same magnitude,” Mr Deane said. “Nevertheless, a sustained decline of at least 10% is needed in 2016 to drive cotton mill use at the expense of synthetics.”
Cotton for March stood 0.4% higher at 63.60 cents a pound on Tuesday, recouping some losses in the last session blamed in part on oil price weakness.