Cleveland on Cotton: Have Prices Soared Too High?

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    Like the legendary Icarus, of Greek Mythology who flew so high the Sun melted his waxed wings and he fell to Earth, cotton is beginning to price itself out of the fiber market. Speculators and the few growers trying to squeeze the last point out of the market will not like this, but cotton prices are too high.

    Despite the damning inflation brought about by the failure of U.S. monetary and fiscal policy, cotton prices are just too high to sustain demand. Despite the unsustainable increase in agricultural inputs, cotton prices are just too high to sustain demand. Mills are indicating spinning cotton is unprofitable. Cotton is the facing demand degradation.

    The May contract is silently going away, and July will become the spot month in less than two weeks. First Notice Day for the May contract is April 25 and May option trading expires April 14. Open interest in the July contract now exceeds that of May. Yet, there are still some 2.5 million bales of long fixations (buying futures) and 300,000 bales of short fixations (selling futures) that must be settled on May futures.

    Too, the July contract still has excellent support as about 5.5 million bales must be bought on that contract before June 24 and only about 600,000 bales need to be sold. The ratio of buying futures to selling futures is 9.2 to 1. Thus, the on-call sales positions will continue to offer support to July. Possibly another round of fireworks is in the works, but the bullishness of the 2021-22 cotton marketing season is all but a memory.

    The May/July contracts have another shot at 140 cents, but since cotton has all but priced itself out of the yarn market, cotton sales have slowed to a crawl and prices will look for a new trading range, most likely between 125 cent and 135 cents. To remain competitive in the yarn market cotton futures, need to slip back below that level. The sooner prices fall to 120 cents the brighter the demand for cotton will be.

    Even at that, 120 cents will still be pricy for yarn spinners. The May and July contracts are experiencing lower and lower lows, a signal that the bull run is over. It is about over given that sales have fallen to a snail’s pace, but there is likely another charge left to push prices back to the mid 130’s, strictly based on July on-call sales The bull is pacing for a charge in December. However, that bull has its support from the supply side of the market, not the demand side that took May and July futures to the 140-cent level. In the face of a good timely rain this new bull will lose its footing.

    The new crop December contract was initially supported by strong cotton demand. Two other factors pushed it higher. The widespread drought facing Texas, Oklahoma, and New Mexico has been very favorable for higher cotton prices, and in the absence of rain will more so. There is still time for very beneficial rain, but the region is much drier than normal, and the dryness has continued much later than normal.

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    Additionally, skyrocketing grain and oilseed prices supported higher cotton prices just to ensure that cotton was competitive with respect to planted acres. December futured climbed to a life of contract high this week and settled at 115.48 cents. Compared with the old crop May and July contracts, December futures has made higher and higher lows, a signal of higher prices. Thus, our target of 119-120 cents and the possibility of 125 cents remains alive.

    USDA released its April supply demand report at week’s end. Changes were few and in the scheme of world cotton trading, were insignificant. World stocks were increased marginally, and world production was increased marginally, and world consumption was decreased marginally. The market treated the report as totally expected. USDA’s weekly export sales report did shed light on the market’s reaction to the higher prices of the past three weeks.

    Export sales were only a net of 62,900 bales of Upland and export sales cancellations jumped to 63,600 bales. China led the way in cancellations more than two thirds of the cancellations but did purchase 23,200 bales on the week. However, export shipments were a marketing year high of 455,500 bales. Primary destinations included China, 171,300 bales; Turkey,75,400 bales; Pakistan, 69,600 bales; Vietnam,38,800 bales; Mexico, 20,600 bales; and Indonesia, 15,600 bales. Shipments of Upland were made to 23 countries.

    Expect July futures to move higher on the week as long Index Fund rolls continue (sell May, buy July). December is still in the hunt for 120 cents, but that price is strictly a weather play given slowing demand. Yet, the consumer is still flush with cash and will be for the remainder of the calendar year. Retail sales will continue strong.

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