Cotton prices began the week trading narrowly in anticipation of the Fed’s decision on interest rates. Though we got what most expected, another pause, it was Chairman Powell’s post-announcement comments that spooked the market. Consequently, after hitting a high of 88.44 December retreated to 85.91, a small loss of 53 points on the week.
Though some improvements in the economy were noted he also stated it has “a long way to go” to reach its two percent target. He further suggested they are likely to raise rates one more time this year and will cut rates more slowly in 2024 and 2025 than previously expected. All of which does not foster the demand for cotton as a stronger U.S. dollar decreases our competitiveness in world markets.
Last week’s disappointing export sales are illustrative of this. Though 23/24 sales topped 100,000 bales for the first time in a month, at 105,800 was still well below the pace needed to meet estimates. In addition, shipments of 150,700 bales were down 15% from the four-week average. Another sign of weak demand, the volume of certificated stocks is building. As of last week, they stand at 20,485 bales.
Crop conditions continue to deteriorate across the Cotton Belt becoming ever more visible as pickers begin to roll. In the drier areas of the Southeast, early harvest results have yields barely exceeding a bale to the acre. This is our worst nightmare made worse with production costs so front end loaded. Even the unheard of is being talked about, abandonment. At present, the portion of the U.S. crop rated good/excellent remained unchanged at 29 percent while that rated poor/very poor increased to 43 percent. Two thirds of the Texas crop falls into the latter category. The old saying “a short crop gets shorter” comes to mind.
Where to from here? It’s obvious with demand at its lowest a short crop is the primary reason cotton prices have been able stay at current levels. Otherwise, we would be testing the contract low of seventy-one cents. We all know market rallies built on short supply are unsustainable with advances limited. Strengthening demand is critical in pushing prices to new heights. Though considered an eternal optimist, as for the latter, I see little promise as the macroeconomic environment stands in the way. This includes a hawkish Fed lessening the chances of a soft economic landing. A Congress whose divisiveness could lead to another government shutdown which scholars say would cost our economy six billion dollars a week. Unions of all types are staging burdensome strikes on their employees. The military conflict between Ukraine and Russia is intensifying. Not to mention, the ripple effect China’s economic woes will have on that of the world’s. In the face of all this, if I’m a consumer who must eat and go to work, these trusty old worn-out jeans will last me another year or so.
Before you go looking for the nearest cliff to jump off, do remember we are one day closer to many of these issues being rectified. Fortunately, for now a short crop is offsetting the pressures of weak demand thus supporting but limiting current prices. As for a significant rally, it’s relegated to hopefully the not-so-distant future.