Thompson on Cotton: Inflation Continues to Ease

    Line of modules during cotton harvest. ©Debra L Ferguson

    Expectations were for an active trading week with the release of several reports and key indicators, but last week’s market activity was lackluster. It did trade in a four-cent range reaching a high of 83.10, nevertheless, closed within five points of where it started at 81.22. Considering the bearishness of the July WASDE report and disappointing export sales it felt like a win.  

    The much-anticipated July WASDE projections showed an increase in both U.S. and world-ending stocks. Domestically, they were up 300,000 to 3.8 million bales. Production was unchanged at 16.5 million bales, but exports were lowered 250,000 bales to 13.75 million due to reductions in world trade. However, not accounted for is a sense the U.S. crop is shrinking as weather conditions in the Southwest are taking a toll. At last report, forty-one percent of the Texas cotton crop is rated poor to very poor, while the overall U.S. crop rose to 25 percent from 21 percent the previous week.  

    Global numbers were bearish, as well. World ending stocks are projected to increase 1.7 million bales, though this was the result of beginning stocks being raised 1.1 million to adjust for larger 2022 crops in Brazil, India, and Australia. The number of greatest concern that will have a major influence on new crop prices is world consumption. For the 2023/24 marketing year USDA projects this to be 116.45 million bales. This seems extremely high when in 2022 world use is expected to be only 110 million. Consuming an additional six and a half million bales given the trying economic times the world now finds itself in will be a tall order. China is already forecasting a reduction in cotton imports due to weaker demand from their textile industry. Their exports have fallen to the lowest level since 2020. 

    Last week’s disappointing U.S. export sales were further evidence of weak demand. Current crop sales total 23,000 bales, understandable since little inventory remains. Nonetheless, new crop sales were a paltry 51,000 bales. Textile manufacturers are in no rush to buy cotton with the Southern Hemisphere producing a huge crop and ours said to have similar potential.  

    All is not negative, inflation continues to ease as seen in the June CPI falling to three percent, nearing the Fed target of two and well below the 9.1 percent in June of last year. Despite this downward trend and interest rates at a 22-year high, comments from Fed governors suggest another hike is likely. Their motivation stems from hiring and economic activity remaining stronger than anticipated. Nevertheless, if we stay on this path the Fed may see fit to take a pause. 

    Where to from here? With little data coming out this week look for the market to continue trading sideways. Managed money funds remain neutral. In the most recent Tuesday to Tuesday reporting period, they were heavy buyers now holding a small net long position. However, during this period the market gained only seventy-one points. This tells us they were covering shorts rather than adding new longs.  Influencing the market this week will be export sales on Thursday and CFTC report on Friday. That is unless some geopolitical event rears its ugly head.  

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