Thompson on Cotton: Too Many Questions for New Crop Production, Highs Yet to Come

    ©Debra L Ferguson Stock Images

    After nine consecutive weeks of price gains, last week saw some consolidation as March and May futures posted triple digit losses closing at 125.28 and 122.91, respectively. Conversely, new crop futures gained 138 points to settle the week at 105.27 and hitting an intraday trading high of 106.36. With new crop futures at a discount to current crop, its garnering the favor of both the trade shorts and spec longs.

    At these lofty price levels, a steady diet of positive news is required to maintain momentum. Last week saw the release of two highly anticipated reports that proved to be rather lackluster. Viewed as neutral by traders, the February WASDE report made no change to U.S. production or domestic use but lowered exports to 14.75 million bales due largely to shipping restraints. In turn, U.S. ending stocks were raised 300,000 bales to 3.5 million.

    Offsetting this slightly bearish news, world consumption is projected to be 124.4 million bales. If this projection comes true, this would be a record offtake for cotton, 3.4 million bales higher than last year and 21 million bales more than in the 2019/20 marketing year. However, given current logistical disruptions and an inflated world economy, this number is debatable. In fact, it’s so debatable that two other trade organizations see it much different.

    Cotlook projects world use to be only 119.06 million bales while ICAC has it even lower at 117.66. Where this ends up is very important as growing demand is critical to keeping prices at current levels.

    Weekly export sales, though slowed, were respectable at 290,700 bales. However, shipments of 320,600 bales once again fell short of the weekly average needed to meet export estimates. Total sales commitments now stand at 12.9 million bales with 4.5 million shipped compared to last year’s 14.1 million with 7.75 million shipped. A herculean task lies ahead of us for in the final six months of the marketing year, we must double the shipments made in the first six months.

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    The most bearish news of the week and one constituting a serious threat to demand is continued growth in inflation. The consumer price index rose in January to an annualized rate of 7.5 percent, the highest it’s been since February 1982. Inflated prices are the dark side of a growing economy, a function of strong demand and short supply. It’s estimated today’s inflated prices cost an average household an additional $276 per month.

    Though we’ve seen little sign of it yet, at some point this is certain to negatively influence consumer spending patterns. Keep in mind, apparel and home furnishings are discretionary items with spending on them easily put off. Taking measures to curb inflation while not applying brakes to a robust economy will require a balancing act by the Fed. We hope a lesson was learned in 1982 when the Fed got too aggressive with interest rate hikes and ultimately led us into a recession.

    Where to from here? There are six trading sessions remaining before first notice day for March futures. With two and half million bales of on call sales-based March yet to be fixed, price hikes are likely as mills are forced to show their hand. This same scenario will play out when May and July near expiration as they are 8.6 million bales of on call sales based these futures.

    As for new crop prices, we feel the high is yet to come. Too many questions hang over the 2022 crop ranging from an unfavorable weather outlook for the Southwest and unknown planted acreage given the high cost of production and competition from other commodities. The window of opportunity to see higher new crop prices will be between now and planting. It’s hard to gauge beyond that for it then becomes a weather market, and its fate will rely heavily on demand.

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