Cotton Extends Slump as Expanding Supply Cuts Costs for Gap Inc
Comment of the Day

May 11 2012

Commentary by Eoin Treacy

Cotton Extends Slump as Expanding Supply Cuts Costs for Gap Inc

This article by Jae Hur, Phoebe Sedgman and Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:
Rains last week in Texas, plus the expected precipitation over the next five days of 0.5 inch to 2 inches, “will favor germination and early growth” of the crop, Kyle Tapley, a meteorologist with MDA Information Systems Inc., located in Gaithersburg, Maryland, said today in an e-mail.

“The ongoing rain event across much of the southern half of western Texas added to the bearish tone of the USDA numbers,” Sharon Johnson, a senior analyst at Penson Futures in Atlanta, said in an e-mail. “Any modest rallies should be used as selling opportunities.”

Eoin Treacy's view Cotton prices broke successfully above 100¢ in 2010 and more than doubled by early 2011. They subsequently gave up the entire advance and have spent much of the last six months ranging below 100¢. Prices broke downwards from this range yesterday and while oversold in the short term, a clear upward dynamic will be required to check potential for some additional downside.

Clothing manufacturers continue to benefit from the decline in cotton prices. However a number of US companies are now quite overextended relative to their respective 200-day MAs and appear to be reverting toward the means. Ross Stores, Carters, PVH Corp, Gap Inc and TJX fall into this category. Provided they find support in the region of their MAs, the medium-term upside can continue to be given the benefit of the doubt.

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