In a November 26, 2023, Barchart article, I wrote:

With cotton consolidating between 80 and 90 cents, it was near the bottom end of its trading range on November 27. If cotton follows the rest of the soft commodities sector, 81 cents per pound could be a bargain for those patient traders and investors looking to take advantage of seasonal strength over the coming months. 

Nearby ICE cotton futures have not moved much since late November, and the price consolidation and decline in 2023 could mean the odds favor a rally over the coming months. 

Cotton dropped in 2023, while most other soft commodities moved significantly higher

The continuous ICE cotton futures contract declined in 2023.

The chart shows a 2.84% decline from the end of 2022 through the end of 2023. Cotton was the only soft commodity posting a loss in 2023:

• ICE world sugar futures gained 2.69% in 2023. After trading at the highest price since 2011 at 28.14 cents, sugar futures closed the year at 20.58 cents per pound. 
• ICE Arabica coffee futures rose to the highest price since 2011 in 2022 but managed to close 2023 at $1.8830 per pound, a 12.55% gain last year. 
• ICE frozen concentrated orange juice futures traded to a record $4.3195 per pound in 2023. After correcting from the high, the price settled at $3.0220 per pound on December 29, 2023, but FCOJ futures were still 46.41% higher in 2023. 
• ICE cocoa futures exploded 61.38% higher in 2023, closing the year at $4,196 per ton. 
  
   

While cotton futures were the only soft commodity moving lower in 2023, they traded to a high of $1.5802 per pound in 2022, the highest price since 2011. 

Price consolidation can be bullish

While four of the five soft commodities posted impressive gains in 2023, cotton futures traded in a tight consolidation range. 

 The two-year chart highlights that cotton futures spent most of 2023 trading between 80 and 90 cents per pound. While the price traded below 80 and above 90 cents briefly, cotton could not sustain prices under 80 or over 90 cents last year. 

After the significant decline from the 2022 high, the consolidation pattern could be a constructive sign for cotton in 2024. 

Cotton tends to rally in spring

Over the past years, cotton prices have tended to peak during spring. 

The chart dating back decades shows significant highs occurring during spring. Price peaks in 1995, 2008, 2011, 2014, 2018, and 2022 occurred from March through June. Spring is the time of the highest uncertainty over the worldwide annual cotton crop that determines annual supplies.

In early 2024, with the price between 81 and 82 cents per pound, the season of uncertainty is approaching. On Friday, January 12, the U.S. Department of Agriculture released its January World Agricultural Supply and Demand Estimates Report.  The report told the cotton market that it forecasts lower production, exports, and ending stocks for the U.S. during the 2023/2024 crop year. Meanwhile, worldwide forecasts rose 2.0 million bales on higher beginning stocks and production and lower global consumption. 

However, the forecast is a leap of faith for 2024 as it does not account for the weather conditions in the leading growing areas that could alter production. 

Futures are the only route for risk positions

No cotton ETF or ETN products track the soft commodities price. In 2023, the BAL ETN ceased trading because of a lack of interest, as it did not have the critical mass of volume to sustain the product. Therefore, cotton futures and futures options are the only routes for risk positions in the cotton arena. 

Each ICE cotton futures contract contains 50,000 pounds. At 81 cents, the contract value is $40,500. Original and maintenance margin levels at $3,712/$3,375 mean market participants can control a contract for a down payment of 9.2%/8.3% of its total value. 

Cotton can be a highly volatile soft commodity. When the global pandemic gripped markets across all asset classes in April 2020, the price of nearby cotton futures fell to a 48.35 cents per pound low.  In March 2022, the price more than tripled, reaching a $1.5802 high. With the price around the 81.8-cent level on January 17, cotton remains below the midpoint of the 2020-2022 trading range, around the $1 per pound level, and could be a target for a seasonal rally during spring 2024. 

Levels to watch in the cotton futures arena

The inside range in the cotton futures arena is 80-90 cents, with 70 cents to $1 the outside range of technical support and resistance. Any move above $1 or below 70 cents could ignite a far more significant technical rally or plunge as trend-following traders likely hop on board a developing trend. 

FCOJ futures are the least liquid soft commodity, suffering from the lowest volume and open interest. In 2023, FCOJ exploded higher to over $4 per pound for the first time. The illiquid nature fostered the explosive rally as offers to sell evaporated as OJ futures rose. The correction to the $3 level suffered the same fate as bids to buy disappeared as the price fell. 

Cotton is the second least liquid soft commodity. Offers to sell disappeared during the rally to over $1.58 in 2022, and bids evaporated when the price fell to 70 cents after running out of upside steam. Therefore, support and resistance levels in cotton at 70/80 cents and 90 cents and $1 are critical as breeches could ignite another significant move. 

I favor the upside in cotton prices after the 2023 consolidation year. However, currency conditions may only favor a test of the $1 resistance. Any move above that level or below 70 cents would require a substantial change in the supply and demand fundamentals, such as a weather event or other crisis, in 2024. 

Another factor that favors higher cotton prices is that the worst-performing sector member for one year often tends to be the best-performing member the following year. Keep an eye on cotton, as the first half of 2024 will likely be the time when the price moves, given the soft commodity’s seasonal nature. 

More Softs News from Barchart

• Cotton Futures Rebounding Starting Wednesday
• Mixed Close for Cotton Futures
• Cocoa Prices Finish Sharply Higher as Global Supplies Shrink
• Sugar Prices Jump as the El Nino Weather Pattern Disrupts Global Sugar Production

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.