Thompson on Cotton: Lackluster Trade, Will Production Problems or Inflation Concerns Win Out?

    ©Debra L Ferguson Stock Images

    After this past week’s horrific tragedy in Uvalde, a discussion of cotton prices seems rather trivial. It’s unfathomable to think such cruelty exists that the lives of innocent children and their caretakers could be senselessly taken. Our heartfelt sympathies and fervent prayers go out to these families and the entire community.

    As if numbed by these events, cotton traded at a lackluster pace this past week. Influencing the market were rains in West Texas and consumer spending worries. The volume of on-call sales fell to below four million bales as mill fixations were aided by managed funds liquidating July long positions to where their net long position now stands at 6.1 million bales.

    December futures declined for yet another week falling 223 points to 122.95 but finding firm support at 1.22. Nonetheless, the market has given up ten cents in the past two weeks.

    As so often seen, the mere hint of rain in West Texas will set the market back on its heels. Areas north of Lubbock received two to three inches of rain last week while rainfall totals totally diminished further south where the bulk of the dryland acres are located. Irrigated acres will certainly benefit while dryland acres absent subsoil moisture will need to be spoon fed all season if a crop is to be made.

    Only 44 percent of the Texas acreage has been planted, while these rains will serve to get the remainder planted. The potential size of this year’s crop will be better known in a few weeks as insurance dates begin May 31 and run through June 20 depending on the region.

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    As for consumer spending, we are getting mixed signals. A week after Walmart and Target announced disappointing earnings, Dollar General and Dollar Tree earnings came in better than expected. The shift to discount retailers is a good indication exorbitant fuel and food prices are taking a toll on consumer discretionary spending. Worse yet, the accompanying chart shows apparel is taking the biggest hit.

    It was reported Friday that U.S. households boosted spending for the fourth consecutive month, but savings rates fell to their lowest level in 14 years. Making use of savings and amassing credit card debt seems to be the consumer’s way of combating escalating prices, actions that are sure to have dire consequences.

    Albeit little consolation, it was also reported Friday the rise in consumer prices slowed to 6.3 percent in April from a year earlier versus 6.6 percent in March. The market will be closely watching for further changes in consumer spending and its resulting impact on the demand for cotton.

    Where to from here? Production is certain to decline due to adverse weather and high input costs. Also, mill use can be expected to fall as consumers are forced to reduce spending on discretionary items due to runaway food and fuel prices. The extent to which these offset each other will determine how far prices fall before support is found.

    Expect much of the same from the market this week as it awaits the fate of West Texas. It is very possible December futures could make another run as indicated by the charts, but if so, look for it to be short lived especially with the spec community in need of bullish news.

    The question now becomes what will the managed funds do after exiting July; add to their long December position like they did in four of the last five years or will they reduce it like they did in 2018?

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