Thompson on Cotton: Market Remains Strong Among Rising Economic Concerns

    Cotton harvest - row of pink wrapped modules. ©Debra L Ferguson

    Most of last week’s market activity centered around the liquidation of the December contract. Up to this point, there have been no surprises and with First Notice Day only a day away, little is expected as it fades into history after a monumental run. In the meantime, the March contract posted a new closing high at 116.92 during the week to settle Friday only a few points shy at 116.43, for a gain of 135 points.

    Last week’s action gives every indication March is prepared to pick up where December left off. However, those ominous clouds on the horizon we previously spoke of are intensifying and are certain to be a factor at some point.

    Covid is on the rise in the U.S. with new cases up 31 percent in two weeks with holiday travel still ahead. Europe is experiencing an even greater resurgence while Austria will impose a 10-day lockdown beginning today and other countries such as Germany are considering the same. China, too, has seen a marked increase in new cases involving the Delta variant.

    Supply chain disruptions which have plagued the shipping industry show little sign of improvement. Last week’s export report indicated only 84,400 bales were shipped. With 37 weeks remaining in the marketing year, we need weekly shipments to average 340,000 bales to meet the export estimate of 15.5 million bales.

    In recent history, such a volume has only been surpassed twice, 2005/06 and 2017/18. Logistically, it can be done but will certainly be a tall order.

    As a result of renewed Covid infections and a heated economy, the U.S. dollar is strengthening versus other world currencies. Last week, it hit a 16-month high at 96.26, up one percent for the week. Need we remind you a rising dollar does not bode well for export sales.

    Fueling this red-hot economy is a consumer eager to spend as seen by an increase in retail sales of 1.7 percent in October, the third consecutive month of increases. Better yet, clothing stores saw an increase of 6.2 percent in sales. Though some of this may be forward buying in fear of even higher prices, nevertheless it violates normal logic where one would expect sales to decline as consumer confidence falls.

    This spending spree is due in large part to being blinded by a so called “wealth effect” created by stimulus payments, rising asset prices, and lower debt while all the while disregarding the inevitable. Case in point, the stock market’s capitalization has grown from 34 trillion dollars to 51 trillion dollars since the pandemic began.

    When profit taking reverses these fortunes and interest rates begin to rise the chickens will come home to roost.

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    Where to from here? With December soon off the Board, March officially becomes the cover month. Though export sales last week were only 164,500 bales, underlying demand still appears strong. In our conversations with both domestic mills and foreign purchasing agents, they indicate business is as good as it’s been in years.

    The managed funds seem content with cotton fundamentals as they’ve added to their net long position for three consecutive weeks, to a historically high level of 8.3 million bales. Lending further support is 12.9 million bales of on call sales which equivalent futures must be bought between now and July. Since the immediacy to price has lessened with December off the Board, we could see March futures slip slightly.

    However, export sales and mill fixations will come to the rescue on any significant price reversals. As for the 2022 crop, prices have held steady around 92 cents. Major movements are not likely until planting intentions are better known. Informa, a market intelligence group, offered the first glimpse.

    Though not quite sure where their data is derived, they estimate corn acres will decline 2.5 million acres to 90.8, soybeans up 700,000 to 87.9 million acres followed by cotton up 900,000 acres to 12.1 million. Considering current prices and increased production costs, such figures appear realistic.

    In closing, at a time of thankfulness, we should all take a moment to reflect on the blessings of life. We at Choice Cotton wish you and yours a Happy Thanksgiving.

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