levels to watch after hitting a nine-year high

Cotton price is on a nine-year high at $104.42 in the intercontinental exchange (ICE). Low supply and rise in demand are the key drivers of the rally.

Supply constraints

The surge in cotton price is largely due to the adverse weather conditions in key growing areas. In the United States, which is the largest exporter of the soft commodity across the globe, excess rainfall is threatening the current crop. The Mississippi Delta and Texas are some of the affected regions. In the previous year, the country recorded a lower crop.

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According to September’s WASDE report, US cotton production dropped by 26.6% from the 2019/2020 season to 3.181 million tonnes. The US Department of Agriculture indicated that global output is expected to decline by 7.4% from the previous year for the season that began on 1^st August.

India, which is the largest producer of cotton in the world, is also expected to record a decline in output by 1.7% YoY. Granted, China and Australia are expected to have increased production. However, the forecasted drop in global ending stock highlights a rise in demand. In particular, China has been purchasing record amounts of US cotton in recent weeks. Pakistan and Turkey are also among the countries buying the product in large volumes.

Cotton price technical outlook

Cotton price is trading at a nine-year high in Thursday’s session. Earlier in the day, Cotton #2 futures in ICE surged to 105.00, which is its highest level since November 2011. Notably, it has since pulled back to the current 104.42; up by 2.43%.

Since the beginning of the year, the soft commodity has had its price rise by about 32.54%. In September alone, it has been up by 12.76%. On a daily chart, cotton price is trading above the 25 and 50-day exponential moving averages. Besides, it is in the overbought territory with an RSI of 77.

In the short term, it will likely pull back before surging further. If that happens, it will probably find support at the psychological level of 100 or lower to 95.75 along the 25-day EMA. On the upside, the next target will be at September 2011’s high of 115.48. A move below 95.75 will invalidate this thesis.