Thompson on Cotton: Desperately in Search of Direction

    Insecticide sprayer in cotton. Photo: ©Debra L Ferguson

    A mid-week holiday had me confused all week as to what day it was. Desperately in search of direction,  the cotton market shared the same confusion. It began the week with lackadaisical low-volume trading but closed strong with a triple-digit rally thanks in part to favorable export sales. For the first time since April, new crop prices posted back-to-back weekly gains settling at 81.17. 

    With four weeks remaining in the 2022/23 marketing year current crop sales already exceed the export estimate of thirteen million bales. Last week it tacked on another 109,200 bales while new crop sales topped 130,000. It was encouraging to see China once again the primary buyer given the post-Covid economic woes they are now facing. Shipments, once a huge concern, continue to be on pace to meet estimates. With 260, 100 bales shipped last week, we now must average 280,000 a week for the remainder of the marketing year.  

    Inflated consumer prices continue to weigh on the demand for cotton. Efforts to rein in inflation are being thwarted by a strong labor market. Unemployment in June fell to 3.6 percent as 209,000 jobs were added. Despite the longest consecutive string of interest rate hikes in history, it has astonishingly remained in a range from 3.4 to 3.7 percent since March. Some wishful thinkers see June’s job gains, the fewest since December of 2021, as a sign the economy can pull off a soft landing in lieu of a deep recession. No matter what happens it gives Chairman Powell & Friends a green light to further raise interest rates without fear of immediate reprisal. The catalyst for this red-hot labor market is wage growth. Over the past three months, wages have increased at an annual rate of 4.6 percent exceeding the 4 percent rate of inflation. In turn, it has propped up our economy but created a bubble poised to burst. Companies will find it increasingly more difficult to pass labor costs, the primary component of prices, along with consumers as interest rates rise. Their recourse will be to lay employees off. Historically, there is a twelve-to-sixteen-month lag before the consequences of Fed actions are realized. Obviously, we are well beyond that. Nonetheless, when the other foot falls it could be disastrous to our economy and consumers within. 

    Crop conditions remain unchanged with rainfall prevalent over most of the Cotton Belt. Instead,  oppressive heat has become a major weather factor. Last Monday ranked as Earth’s hottest day in 100,000 years. A record was quickly broken over the next three days making Monday through Thursday the hottest four days on record. This can be attributed to El Nino raising water temperatures in the Pacific and overall global warming. More worrisome, waters in the Gulf of Mexico are heating up, as well. So much so, the National Hurricane Center has revised its tropical storm predictions. They now project eighteen named storms that will develop in the tropics versus their April prediction of thirteen. Of the eighteen storms, nine will become hurricanes with four possibly reaching category three or stronger. This compares to April’s estimate of six hurricanes with only two reaching Cat 3 status. 

    Where to from here? Obvious uncertainties abound, and markets do not like such. At the risk of sounding like a broken record,   prices are likely to remain range bound as traders seek clarity. Recent activity by managed funds is indicative of this. After being net sellers for three straight weeks, last week they reversed course. As buyers, they reduced their net short position by almost half from a 1.5 million bale equivalent to 800,000. They seem comfortable sitting on the sidelines letting things play out. There are a couple of items they will be watching this week that could have an impact on the market. On Wednesday, the July WASDE report will be released. It will be interesting to see if any revisions are made to domestic production considering fewer acres were planted. In addition, considering the problems now facing China will adjustments be made to their production and import numbers. Also on Wednesday, we will get another reading on inflation as the  Consumer Price Index is announced. A significantly lower reading will be needed to deter the Fed from additional rate hikes.    


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