Rose on Cotton – Cotton Market Finishes Week Lower on Economic Concerns

May 21, 2022 4:00 pm
Published by

Louis W. Rose IV and Barry B. Bean

ICE July cotton gave up 293 points on the week, finishing at 142.27, as the July – Dec inversion contracted to 1709. Last weekend our models predicted a finish on the week that was to be near unchanged to higher Vs the previous Friday’s settlement, which proved to be incorrect. The Dec contract lost 281, finishing at 125.18. The Dec contract is now the de facto lead month by virtue of having the greatest open interest and Dec will now be our primary analytical focus.  This switch has occurred earlier than we have ever seen.

The cotton market moved lower on overall weakness (especially during the latter portion of the week) in energy markets and industrial and retail equities.  Many believe that equities are forecasting a recession, with many (including us) believing that our domestic economy is already in a recessionary state.  Expected precipitation across West Texas early next week also pressured the market.

The end of the optimal planting window for the Mid-south has closed; however, we believe that nearly all intended acres have been sown.  That is to say that we are in stark disagreement with USDA weekly planting progress estimates.  Most of The Belt, including West Texas, is expected to see rainfall by early next week.  Few will complain, if such occurs, and some of our friends across West Texas will probably break out the bubbly.  Memorial Day is fast approaching, so if there is going to be a major drought-busting rain across West Texas, the best chance is upon us.

US export data for the week ending May 12 was nothing special, with net sales and shipments against 2021/22 of around 113K and 354K RBs, respectively. There were sparse sales (~28K RBs) against 2022/23. It is unlikely that the US will export 14.75M bales by July 31, but this is not bearish unless there is drought relief across West Texas.

China is reportedly curbing its COVID lockdowns and re-opening Shanghai, including its ports, which eases a major bearish factor.  Despite that, a USDA attaché report out of China argues that the nation’s extended COVID lockdowns will likely cause the nation’s raw cotton consumption to slow.  In other news, a number of international reports show that we are not alone in believing the USDA’s new crop consumption projection is simply too high.

For the week ending May 17, the trade trimmed its futures only net short position against all active contracts to approximately 12.1M bales while large speculators reduced their aggregate net long position to around 6.9M bales.

For this week, the standard weekly technical analysis for and money flow into the July and Dec contracts remains supportive to bullish. Despite this week’s losses, if expected rains across West Texas do not materialize, the market will likely move higher.

With the end of the optimal planting period rapidly approaching, producers will spend much of the next few weeks testing their risk tolerance.  There is no question that forward contracting 60-70% of estimated yield against a market in the $1.20s is profitable, but the possibility of prices 10-20 cents higher will be a siren call that many producers will simply be unable to ignore.  If the combination of drought in Texas and average to below average planting conditions in other regions proves to produce a less than optimal stand by July, a summer rally is almost certainly in the cards. Should this be paired with improvements in the supply chain and reduced reports of COVID in China, that rally could prove strong.

On the other hand, a few area wide rains across Texas and better conditions in other regions, combined with continued lockdowns and supply chain disruptions could easily cap the Dec contract at or near current levels, and potentially pave a retreat to levels nearer a dollar.

On our own cotton, we’ve priced approximately 50% of estimated production between $1 and current levels and have protected the remainder through a combination of put spreads and insurance.  We’ll be rolling the dice on rallies, knowing we’re protected at a profitable level. This will also allow us to take advantage of any likely tightening of the basis in the fall.

Ultimately, producers should enjoy being in a position of choosing between good prices and better prices.  

Have a great weekend!

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    This post was written by Louis Rose