Thompson on Cotton: Caught in Crossfire Between Demand and Inflation

    Cotton harvest, ©Debra L Ferguson

    Oh, how the mighty are falling! The Dow Jones dropped over 1,100 points for the second consecutive week closing at 29,549 breaching the psychological 30,000-point mark for the first time since mid-June. While closely linked, cotton continued its slide below a dollar settling Friday on limit down trading at 92.54, a loss of over six and half cents on the week. Worse yet it erased two key support levels in the process.

    You could say this was all but inevitable given the government’s penchant for overreacting to extremes. It began with their drunken sailor spending igniting a demand driven economy. In response, they are now slamming the brakes to curb runaway inflation at all costs.

    Caught in the crossfire are cotton prices, which were once bolstered as low inventories struggled to meet demand, but now see demand dwindling as consumers are forced to tighten their belts. At some point, someone had to pay the piper and we all knew who that would be.

    As expected, the Federal Reserve announced a 75-point hike in the benchmark interest rate. This follows similar rate increases from their two previous meetings, now is at its highest level since early 2008. Though such a move was already in the market, it was Chairman Powell’s comments afterwards that prompted last week’s further decline.

    Given signs the economy is not cooling at a suitable pace, they are instituting a “higher for longer” interest rate policy. He further cited though their efforts would inflict short term pain, it would be less hurtful than if inflated prices were allowed to continue. Thus, the likelihood of additional rate hikes sent markets reeling.

    Higher living expenses and falling asset prices are forcing consumers to limit purchases of non-essential items. As a result, global mill demand is rapidly declining with some Far East mills running at less than 50 percent capacity.

    Another good example was last week’s export sales totaling a meager 46,000 bales. Additionally, rumors of sales cancellations are becoming more numerous. Lastly, the fact mills have been in no hurry to fix the over five million bales of on call sales is a good indication business is lacking because they should know better than anyone.

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    Where do we go from here? The market has dealt with both supply and demand uncertainties for months. With harvest now underway, the supply side is becoming better known. Although they are still risks as activity in the Tropics seems to be intensifying.

    At this writing, Tropical Storm Ian, now in the Caribbean, is forecast to develop into a hurricane later this week. Current projections have it hitting the Gulf Coast somewhere between Mobile Alabama and Tampa Florida. The further west its path becomes, the more cotton is at risk. With several weeks remaining in hurricane season, this area will be watched closely by market traders.

    But for now, focused on consumption or lack thereof, their preferred move is to sell the market. In the latest Commitment of Traders Report reflecting managed fund activity for the week ending September 20, an equivalent of 600,000 bales were liquidated from their long position.

    This puts them at 4.2 million bales net long through last Tuesday but likely lower now considering the market’s late week selloff. Prior to the August WASDE report where USDA took a big swipe at U.S. production, cotton prices were trading in the 90’s similarly to where we are today.

    Look for this range to hold at least short term. However, if Friday’s close is breached the previous low of 82 cents will become the next level of support.

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