Cleveland on Cotton: Slippage in Demand Weighing on Prices

    Photo: USDA

    These are difficult times for the American cotton grower.

    Cotton prices have tubed. Drought devastated the Southwest. The Far West was under water allocation. Thankfully, many Mid-South growers harvested an excellent crop. Yet, most depend on diversification and very specific crop rotation patterns. And while they might brag about their cotton crop, many cannot move their grain/oilseed crops because the Mississippi River is too low for barge traffic. Growers see cotton prices down some 45 cents a pound compared to four months ago.

    Yet, the grower, the American Farmer is the ultimate optimist. They plant, plant, and plant…and suffer through the emotions that most are literally shocked to learn. However, growers simply take those trials and tribulations as “just normal.”

    Cotton prices are off 40% compared to just four months ago. It does not matter what soybean prices are if elevators are full, the river is blocked, and storage is not available. But wait, these are farmers. They know better days are ahead.

    These are the times that growers face. Over a 10-year cycle, cotton growers will make a profit in only seven or eight years. They lose money in the other years. Agricultural markets simply do not allow a profit every year. Knowing this, growers will plant, and the market will come back to them. The market will come back!

    Now, for the rest of the story if you care to read the market comments.

    Composing these comments, I was reminded of what Tommy Funk, that great Rio Grande Valley grower and cotton leader, told me over lunch some 25-30 years ago. The market was very similar to the current situation. Tommy said, “I would rather slit my wrists than listen to your speech.” He graciously thanked me for my presence and excused himself. He well knew of the gloom and doom. He knew it. He was living it. He did not want to hear it.

    So, if you are still reading, we are facing nine months of gloom and doom, hopefully no more. Yet remember, markets are at their lowest when gloom and doom prevails. Remember, the night is the darkest before the dawn.

    For the second consecutive week, nearby cotton prices fell to lows not seen in over a year (81-82 cents) as the uncertainty surrounding the health of the U.S. economy remains in question. USDA’s October supply demand report amplified the bearish tone as the report confirmed an increase in both U.S. and world carryover stocks.

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    Other government reports validated bearish concerns for the remainder of the 2022-23 marking year as the U.S. Department of Commerce’s October inflation report indicated that the 40-year high in inflation continues. Then, the Fed published a notice that it intended to further increase the bank lending rate.

    All three of the reports simply relay news to the cotton market that the slippage in cotton demand will continue to weigh on prices. Growers and mills should expect prices to remain in the very low to mid-80 cent range between now and the expiry of the December futures contract. In fact, it is likely that prices will not improve until after March 2023 or later. Price support below the current 81-82 cent level lies in the 77-78 cent range.

    It is noted that recent market activity has challenged the 81-82 cent level and that the price support has held. Price support for the 2023 crop is at the 72-73 cent level although the current trading range, just above 75 cents, has supported recent attempts to move lower. The current 75-cent technical price support level will hold unless the old crop December does fall below 81 cent mark.

    The new crop December 2023 price outlook will appear very bearish between now and mid-February as grower indications of a 20-25% reduction in 2023 plantings circulate through the market. However, the December 2023 contract should find fundamental support and allow futures prices to challenge the 80-cent area going into the 2023 planting season. That will not be enough to attract needed plantings, and prices should further rise into June-July 2023.

    We do not expect the new crop December price to reach the 90-cent area – a price most growers  suggest they need if they are to keep cotton acreage from declining. Thus, there is a light at the end of the tunnel, at least for the new crop. Too, quality will command a keen premium during the 2023 season.

    Briefly, the October supply demand report included a 400,000-bale decline in world production, down to 118 million bales. World consumption was reduced 3.0 million bales, down to 115.6 million. Thus, world carryover was increased from 85 million to 88 million bales. It is this increase that is problematic for the market. U.S. production was unchanged at 13.8 million bales, U.S. consumption was unchanged at 2.3 million bales. However, USDA reduced U.S. exports 100,000 bales, from 12.6 million bales down to 12.5 million bales.

    The coming four months will be exceptionally important for U.S export sales. If the U.S. is to reach the USDA estimate, both sales and shipments should increase now that the 2022-23 crop is readily available for export. We would not expect to see adjustments in USDA’s estimate of exports until February at the earliest.

    Unlike past years, textile mills have been very active with price fixations now that market prices are in the 80s. Mills view the current price level as approaching the bottom, if not already there. Likely, the market does have little downside risk at present levels. However, we cannot rule out a test down at the 77-78 cent support level. We do not think the market will trade that low, but the possibility is there.  Nevertheless, price recovery will be very tedious and slow.

    There are better days ahead for cotton.

    Give a gift of cotton today.

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