Thompson on Cotton: Liquidation by Market Longs to Blame for Price Drop

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    Shellshocked! Stupefied! Disheartened! These are just a few words to describe emotions following last week’s market blood bath. Though expecting a reversal for weeks, we did not foresee one of such severity and abruptness.

    Upon incurring daily triple digit losses, the December futures contract closed below a dollar for the first time since January 28 settling Friday at 98.05. This is a 30-cent decline in new cotton prices over the past five weeks with twenty-one cents of that coming in last week’s trading.

    Cotton was not alone, all demand sensitive commodities such as crude oil, metals, and food crops took a beating. Copper has entered a bear market falling 24 percent from its peak in May. This is significant because it’s been the precursor to every recession of the past thirty years.

    Continued inflation and a looming recession are weighing heavy on the minds of consumers. Gas sales for the first week of June were down 8.2 percent from a year earlier, the 14th consecutive week they’ve trailed 2021 levels. Many employers are beginning to rescind job offers. This suggests a crack in the job market whose strength up to now has staved off a recession.

    At the risk of sounding trite, haircut prices are up 6.2 percent from this time in 2021, the largest increase since 1982. Economists say this is a true sign inflation has reached across all sectors of the economy for these are in no way affected by supply chain disruptions.

    Back to cotton, last week’s action was not about fundamentals but a liquidation by market longs. Friday’s CFTC report showed managed funds reduced their net long position by over 200,000 bales to the equivalent of 6.1 million.

    Fortunately, most of this change involved old crop July futures as it nears expiration with only a minor change being made to their new crop position. Keep in mind, this report reflects activity through Tuesday, June 21 when December was trading at 1.13. Thus, with the market declining another 15 cents, it’s a given further liquidation has taken place encompassing new crop as well.

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    We commented previously how fickle this bunch can be, so the question now becomes will they go to the extreme of shorting the market. The last time this occurred was in 2018 where they went from 12.4 million bales long to 2.8 million short in a matter of six months.

    Though the market is not trading fundamentals at present, they do remain favorable. At 295,000 bales, combined current and new crop sales last week were respectable considering the market was trading at $1.18.

    As the primary buyer, China has purchased over half a million bales in just the past two weeks. Most encouraging, the volume of sales cancellations remained small at only 6,700 bales. As for supply, insurance adjusters are making their rounds so the extent of abandonment in the Southwest will soon be known.

    Also, USDA releases its planted acres report this Thursday which will shed some light as to the possibility of additional bought acres in the Mid-South and Southeast.

    Where to from here? After last week, there is little doubt this market is oversold just as it was overbought at $1.30. A return to those heights is not in the cards. Nevertheless, a dead cat bounce of a few cents can be expected. Any significant rebound, however, will be met by grower selling thus short lived.

    We desperately need spec selling to ease but with the technical charts a mess as the 100 day and 200 day moving averages broke such might not be the case. The mills could also come to our aid by fixing a portion of their six million bales of on call sales, buy why so in a falling market. Since this leg of the bull market began at 90 cents late last year, we could very well see a return there before price consolidation occurs.

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