Cleveland on Cotton: Demand Fundamentals Slipping, But Supply Still Highly Supportive

    Irrigated cotton ready to bloom. Photo: Larry Stalcup, AgFax Media

    Patience, patience, patience.

    Most all cotton fundamental signals weigh in on the side of higher prices, but not all. In fact, compared to last season, the weaker fundamentals have shifted to the demand side of the price equation and the stronger variables affecting price come from the supply side of the equation.

    Too, despite all the drama associated with the “record sell-off” coming just a month after historic high prices, December 2022 prices are 100 points higher than the December 2021 contract was a year ago at this time. That is, just to say, don’t give up on cotton. Yet, its nose has been bloodied and its face all but battered in, but up from the mat she has risen to stand tall and prepared to throw a few punches of her own now.

    However, remember this market is blood stained, and straight up is not the path of least resistance. Nevertheless, we have called this a strong market, and a strong market it is. Despite all the drama, cotton prices are 100 points above the price a year ago. While 87 cents held last year, the weakening demand allowed this years’ prices to slip to 81 cents. We have written of the market holding one since the low 90s, and now it is finally time.

    There will be a few more bearish trading days, especially as one focuses solely on demand. But the supply demand interaction, as reflected by carryover stocks, call for yet higher prices. Many see December topping out at 102-103 cents. I will continue to keep the 110-cent level hat on. I am not sure it fits me, but I will continue to wear it. Knock it off if you can.

    We know that bullish markets find their roots from the demand side of the equation. But we also know that the current U.S. economy suffers from rampant inflation and slowing demand, with stagflation likely on the horizon and bookended by concerns regarding just how deep the ongoing/upcoming recession is.

    Usually, we don’t generally know if we have suffered through an economic recession until it is almost over, but this economy is touching all the necessary bases to date to call for a recession. That gobbledygook economic stuff – stuff I love – is said just to suggest the December 2022 contract is looking for price guidance from U.S. and world production.

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    In its July supply demand report, USDA lowered its estimate of the 2022 production one million bales, down to 1.5 million from 16.5 million. USDA also lowered U.S. ending stocks for 2022-23 to 2.4 million bales, down 500,000 – a significant reduction and a stock level that is considered very market bullish.

    Likely, the August report will reflect a crop that is closer to 14.5 million bales, and USDA is expected to lower carryover down to 1.9 to 2.2 million bales – all but the absolute lowest stocks can go (there are always stocks in transit, stocks in domestic warehouses, and unsold U.S. stocks in foreign warehouses, i.e., stocks can never go to zero). Thus, the market can continue to expect upward price pressure from ever-declining stocks.

    While USDA increased world ending stocks, the increase was associated with declining consumption in four of the world’s largest consuming countries: China, India, Bangladesh, and Vietnam. World consumption was decreased to 119.9 million bales, down from the prior estimate of 121.5 million. World carryover was increased from 82.8 million bales, up to 84.3 million.

    World production was reduced nearly 1.3 million bales. Additional production declines could come in China, Brazil, India, Pakistan, and Brazil. Thus, it is noteworthy that the crop in the world’s leading producing countries is somewhat behind the eight ball. Granted, it is still early, and the crop is fruiting well. But it is July, and it is supposed to fruit well in July.

    There will be a few headaches along the way. The Fed will continue with interest rate hikes, and that will reflect a higher value for the dollar vis-a-vis other currencies. Thus, cotton for export will become even more expensive to foreign buyers. Yet, exports will be just as big “as the U.S. crop is.” We will sell all that is produced and likely another 1.0 to 1.5 million bales. U.S. carryover stocks are going to be low for another two years.

    The basis remained strong throughout the sell-off, reflecting that the price disaster was related to the futures market (speculators and funds riding the trend), not the cash market. December and Red December will get their rally. The market will give you another chance above the dollar mark.

    Patience, patience, patience.

    Give a gift of cotton today.

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