How will ICE cotton fare after hitting 16-month high?

ICE cotton futures market rose significantly during the Spring Festival holiday, reaching a new high in nearly sixteen months. The major ICE contract increased by 2.88% compared to Feb 9 before the holiday, with a 0.49% higher increase than the ICE05 contract. This was due to the major ICE contract switching from March to May starting on Feb 12. Looking at the price trends of different contracts, the overall trend is rising first and then falling. The price increases of the March, May, and July contracts are similar, and the price levels of the May and July contracts are also very close. However, the Dec contract remains in a discount position and has a relatively larger decline, indicating that the overall structure of the ICE contracts is strong in the near term and weak in the long term.

Considering the current situation, the USDA Feb supply and demand report once again lowered the global production estimate by 80,000 tons to 24.56 million tons, a decrease of 750,000 tons compared to the previous season. The ending stocks of US cotton were reduced by 20,000 tons to 610,000 tons, a decrease of 320,000 tons compared to the previous season. In addition, the market speculation of a "squeezed" US cotton market further supported the continuous increase in prices. Meanwhile, the latest CFTC report showed a significant increase in the ICE fund net long position to 27.97%, a 16 percentage point increase compared to the data on Jan 30 before the holiday.

The combination of the major contract switching and the tightness in ending stocks during the holiday period significantly intensified speculative sentiment in the US cotton market. This led to a successful breakthrough of the trading range that has been oscillating between 70 and 90cents/lb for the past one and a half years. Technically, the short-term cotton futures have reached the upper pressure level of the Bollinger Bands, indicating an increasing downside risk. Besides, according to the USDA Agricultural Outlook Forum's predictions, the US cotton planting area for the 2024/25 season is expected to increase by 7.5% to 11 million acres. This could become the foundation for bearish counterattacks in the future, and it is recommended to pay attention to the US cotton planting intentions survey in mid to late March.

Looking ahead, since ICE cotton has already broken through the upper limit of the medium to long-term trading range, a strong upward trend has formed. From a medium to long-term perspective, the 90-cent level has shifted from resistance to support. ZCE cotton futures market may open high after the festival. However, the strength of the subsequent rally still depends on downstream demand and whether cotton yarn prices can have a "good start."