Thompson on Cotton: Some Excitement Has Returned

    Cotton modules lined up in a gin yard. ©Debra L Ferguson

    After advancing 326 points and closing higher for the fourth consecutive week, some excitement has returned to the cotton market. For the past eight months, it has steadily traded in a range from the mid 70’s to the mid 80’s, giving neither buyers nor sellers cause to do anything. However, Friday’s settlement at 84.48, the highest weekly close in over four months, has sparked interest on both sides. The question now becomes are we poised for a breakout or simply a repeat of the past eight months? Ever the optimist, I would like to believe we’ll see some follow-through trading this week. However, being a realist, one hurdle stands in its way a lack of demand. 

    USDA world consumption projections do not reflect current world trade. Instead, this latest move has been fueled by misconceived macroeconomics, technicals, a shrinking crop. Ever sensitive to the economy, cotton prices have gotten a boost from equities with the Dow closing higher the past ten days, its longest winning streak since August 2017. The growing sense we may dodge a recession and interest rates have peaked has prompted a renewed interest in stocks. When in reality, a resilient labor market may be masking or delaying the repercussions yet to come.  

    The hottest summer on record is certainly taking a toll on the crop, as well as those working outside in it. In no way will the U.S. crop meet current projections of 16.5 million bales. Deteriorating crop conditions, once confined to the Southwest, have now spread to other cotton-producing regions. Even where there is ample moisture, such extended periods of triple-digit temperatures may have a greater adverse effect on this crop than we now realize. If that is not enough, with the Gulf of Mexico resembling a hot tub, harvest season could get dicey. Therefore, look for the 2023 crop to be closer to fifteen million bales. That being the case, one would surmise a smaller crop should result in higher prices but not if you cannot sell it.  

    Last week’s export sales were less than impressive with current crop sales of 67,100 bales and new crop of only 86,100 bales. Retail sales for the month of June were up 0.2 percent but below expectations. Sales of clothing and home furnishings surprisingly rose 0.6 percent but far less than the 1.4 percent growth a year ago. In addition, retail inventories have declined for the third consecutive month. Another sign of global inflation, Chinese imports last month totaled eighty thousand tons down from 110 thousand tons in May and well short of the 2.03 million tons they took in this period a year ago.  

    Where to from here? Technically, this was an impressive week where not just one but nearly two upside targets were reached, the next being 84.50.  The fact this happened with open interest on the rise gives it even greater credence. The next level of strong resistance will come at 86 cents. Managed funds through last Tuesday added to their net long position which now stands at a bale equivalent of a little over 500,000. However, once again it was short covering on their part rather than establishing new longs. Absent a buying spree by them I see little in the way of price momentum. I am constantly reminded market rallies cannot be sustained on short supply alone, instead it must be accompanied by demand. View this recent move to the high side as a pricing opportunity for such levels may look good come Fall. 

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