In desperate need of a tourniquet to stop the bleeding, last week’s market did receive some first aid with the help of a limit up move on Wednesday. Even though December futures gave up a half cent on the week, it was a moral victory considering the prior week’s 21-cent loss. Another positive, the uptrend line remained intact as prices rebounded from a low of 91.20 to close Friday at 97.48.
Managed Funds remain in control continuing to liquidate their long position. The latest COT report reflective of activity from Wednesday, June 22 through Tuesday, June 28 shows them reducing their longs by 1.4 million bales in addition shorted the market two hundred thousand bales. This equates to a net long position of 4.6 million bales, a significant decline from 9.4 million bales on October 1, 2021, when cotton prices first exceeded a dollar.
Even the insistently long Index funds have been net sellers 13 of the past 16 weeks. Pessimism concerning the world economy, fear of demand destruction, and failing technical charts have all led to this change of heart. Though we find it little consolation, cotton is not alone.
Currently, only nine percent of all commodities are trading above their 100-day moving average while a mere 33 percent are above their 200-day. Economic data certainly warrants such fear, as consumer spending declined 0.4 percent from the previous month to its lowest level this year due largely to a 6.3 percent rise in consumer prices.
Nevertheless, current export sales do not reflect a serious decline in demand. But keep in mind the futures market, as the name implies, trades on what it thinks is going to happen in the future and not so much on current conditions. Last week, when combining all marketing years, export sales were 121,300 bales. Encouraging, the number of buyers increased as twelve different countries participated.
Better yet, sales cancellations of 36,000 bales, though slightly higher than last week, are not indicative of a major decline in demand. All the while, shipments of over 370,000 bales were good for this time of year and is that much less that can be cancelled.
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With July now off the board, December futures will take on a life of its own. Expect a great deal of volatility as production numbers become a moving target that will be weighed against world demand. Last week’s trading range of over eight cents from 91.20 to a high of 99.49 is a good example. This was influenced by the long-awaited release of the 2022 planted acres estimate. NASS projects the U.S. will plant 12.4 million acres to cotton this year.
This is an 11 percent increase from 2021, but an increase of only 2.2 percent over March’s planting intentions estimate. The Southwest (Texas, Oklahoma, and Kansas) accounted for most all the increase. Thus, the market viewed this as friendly considering current conditions in the region favors a much lower harvested acre number. Over the next several weeks, adjustments to yield and abandonment will be made using these acres thereby giving traders a moving target from which to ponder.
Our hearts go out to growers in the Southwest as drought conditions are reminiscent of 2011. Final abandonment could easily exceed 50 percent with yields on that harvested certainly to fall below average. In talking with growers southwest and west of Lubbock, there is a good possibility 85 to 90 percent will be abandoned before harvest. In other areas receiving May showers, thin skippy stands will need additional rainfall to make it to harvest.
Even irrigated acres could see higher than normal abandonment for growers learned in 2011 you cannot water through a drought. U.S. production could easily come in two to three million bales below the current estimate of 16.5 million bales. Presently, we feel the market isn’t taking into account the severity of this situation.
Where to from here? Certainly, there was a sense of relief to find support in the low 90’s ending the freefall for now. In the coming weeks, expect see-saw trading as the market seeks to determine which poses the greatest risk, production scares or the economic effect on demand. In the minds of traders, their recent actions suggest the latter but that is a perception and things can change.
For prices to move back above a dollar and beyond, managed funds need to be enticed to reverse course once again. Though keep in mind, market rallies can only be sustained by growing demand, production shortfalls will only do so temporarily.