Thompson on Cotton: High Volatility as Traders Weigh Lower Production vs. Lower Consumption

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    Last week was the same song, third verse. For in as many weeks, new crop prices have fallen from a high of 133.79 to Friday’s close of 117.90, a loss of almost sixteen cents. If not for a holiday-shortened week, it may have been even worse as intraday trading did hit a low of 114.28, a level not seen since April 4 before rebounding slightly.

    Once again, it traded in a wide range of almost nine cents. Such volatility is indicative of a market torn between two opposing influences, lower production or lower consumption. The shorts fear the former while the longs are concerned about the latter.

    Much of the headlines last week centered around rains in the Southwest. Previously, most of the rainfall was relegated to irrigated areas. However, recent showers did fall on a sizable portion of the dryland acreage. This should allow stands to be obtained in areas where once it looked doubtful.

    Even so, in the absence of subsoil moisture, later abandonment cannot be ruled out. Therefore, the potential size of the West Texas/Oklahoma crop will remain uncertain for bit longer to a market looking for answers.

    Despite these troubling economic times, to our surprise, there has been little sign of demand erosion. For instance, last week’s export sales for all marketing years were an outstanding 465,000 bales. Purchasing over half this volume was China; however, fourteen other countries were buyers as well.

    Comparatively, shipments hit a marketing year high of 499,000 bales. Of course, a decline in December futures of thirteen cents certainly aided the cause.

    In an in-house study, it was revealed for the past 62 years, year over year world consumption decreased in only 18 of those years. Furthermore, only five of those 18 years experienced decreases exceeding three percent. Looking even closer, each of these five could be attributed to a major world crisis.

    • 1974-75         Energy Crisis                                        down 6%
    • 1998-99        Asian Currency Crisis                         down 3.1%
    • 2008-09       Subprime Lending                              down 12%
    • 2010-11         $2 Cotton Demand Destruction       down 4%
    • 2019-20        Covid                                                      down 13%

    The question now to be asked is will the impending global recession be the next major world crisis. The USDA currently estimates world consumption at 123 million bales. A three percent decline would have world use at 119 million bales, or worse, a five percent decrease would drop world consumption to 117 million bales.

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    On the supply side, if Texas abandonment comes in at a very possible 50 percent, U.S. production will fall two million bales short of current estimate. When added to expected production losses in India and Brazil of one million bales a piece, world supply and demand could become a zero-sum game.

    Where to from here? With cotton fundamentals still supportive, traders will be watching how the above scenario plays out. If a recession reaches crisis stage significantly eroding demand, the shorts will feast in driving this market south.

    On the other hand, if world cotton supplies decline greater in relation to demand, the managed funds will be enticed to buy back into the market. Until we get a clearer picture the market will remain volatile, but range bound while it reacts to the news of the day. Noteworthy news this week will be Thursday’s export sales report and Friday’s June WASDE report.

    Finally, we must remind everyone this speculation does not account for any surprises on the geopolitical scene such as an escalation in the Ukrainian-Russia conflict, strains on China – US relations, or other black swan events.

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