Thompson on Cotton: May Futures Nearing a Top

    Clean young cotton field in the Lower Rio Grande Valley. Photo by Danielle Sekula Ortiz.

    Last week’s cotton market was nothing short of a roller coaster ride. In Monday’s session alone, May futures set an intraday high despite trading in an eight-cent range. December futures moving within a range of five and a half cents did the same.

    Unfortunately, these early gains were surrendered as May closed the week at 134.55, losing 135 points. In turn, December settled at 110.68 for a loss of 106 points. Expect much of the same volatility as long as specs remain in control.

    After following the cover month for some time, new crop futures are slowly separating itself. While the May contract is more focused on demand, December futures is looking more toward planted acres and the potential size of this year’s crop. This was reflective in Thursday’s market activity when May futures gave up four cents on disappointing export sales.

    Current crop sales of 241,390 bales were down 22 percent from the previous week and 31 percent off the four-week average. Shipments fell to 343,120 bales, a pace, which if maintained, will fall half a million bales short of export projections.

    With last year’s crop all but out of the hands of growers, our primary focus shifts to new crop December futures. The highly anticipated USDA planting intention numbers for cotton were released last week. Their estimate of 12.2 million acres was in line with industry thinking thus came as no surprise.

    The market sold off slightly as the bulls were hoping for something under twelve million. In simple terms, using a historical yield of 856 pounds per acre and an average abandonment rate of 19 percent, this equates to a seventeen million bale crop. However, after traveling in West Texas last week, I can honestly in the 27 years of doing so I have never seen this region as dry.

    Some are saying it is even worse than 2011 when 7.5 million acres were planted but only 2.8 million were harvested. Even though the chance of a spring planting rain exists, the fact there is no subsoil moisture, crop insurance payouts are lucrative, and the weather forecast is less than favorable, it is quite possible half the Southwest acres or more will be abandoned.

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    Since this region makes up 60 percent of the total U.S. cotton acreage, this would reduce the 2022 crop by over three million bales. Since final planting dates in the Southwest range from May 31 to June 20, it will be several weeks before the severity is truly known.

    Where to from here? May futures are nearing a top as mills are finding it increasingly difficult to pass along these lofty prices. Regardless, there are several underlying factors currently providing market support. With call options still in high demand, subsequent hedging activity by the trade is supplying upward pressure.

    In addition, 8.8 million bales of on call sales must be priced between now and the end of June, as compared to 4.6 million a year ago. Increasing their net long position for the second consecutive week, the specs seem ready to stand their ground thus putting the squeeze on mills. May futures can be expected to trend downward in the coming weeks as money managers roll their positions prior to its expiration.

    Conversely, December futures is likely to trend in the opposite direction prompted by adverse weather conditions in the Southwest. The July-December spread now stands at twenty cents, 130.93 versus 110.68. As this gap is expected to narrow, the big question becomes how.

    Rather than July fully retreating, we would much prefer the two meet in the middle. This week, keep an eye on a couple of potential market movers, Thursday’s export sales numbers and Friday’s April WASDE report.

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