Rose on Cotton – Cotton Market Finishes Week Lower on Mounting Economic Concerns, Interest Rate Hikes

June 20, 2022 8:51 pm
Published by

Louis W. Rose IV and Barry B. Bean

ICE Dec cotton gave up 407 points on the week, finishing at 118.29, with the Dec – Mar inversion contracting to 414.  Last weekend, our proprietary models predicted a finish on the week that was to be near unchanged to lower Vs the previous week’s settlement, which proved to be correct.  The market is closed until Monday evening in observance of the Juneteenth holiday.

The cotton market moved lower despite strong US export sales data and hot and dry conditions across much of The Belt (especially West Texas), on serious economic concerns brought about by a ¾ point interest rate hike from The Fed and surging inflationary pressure.  Strength in US currency also pressured our market.

It is expected to be hot across The Belt for the coming week, with the hottest temperatures expected across West Texas, but temperatures across the Mid-south are likely to rival and exceed 100°F, too.  The southeastern states are expected to see shower activity this week while the balance of The Belt is expected to be mostly dry.  While most of the Mid-south crop is irrigated, large portions of the Tennessee and North Mississippi crops are sown on dryland hill acreage.

For the week ending June 12, US planting progress was estimated at 90% complete, up 6 percentage points on the week and Vs the rolling 5-year average of 88%.  The crop was rated in 46% good or better condition, off 2 percentage points Vs the previous week.  Less Texas, this year’s crop is mostly in fine condition.  USDA’s estimates that 14% of this season’s crop is setting fruit, nearly on par with the 5-year rolling average.

Net export sales and shipments for 2021/22 were lower (sales notably so and a MY low) Vs the previous assay period at around 27K and 349K RBs, respectively.  Sales against the new crop were almost 381K RBs, but the vast majority of sales were to China, raising concerns about remainder of world (ROW) demand at recent prices.  Shipments were well off the average weekly pace required to meet the USDA’s export projection. Cancellations were negligible.

China is once again enforcing lockdowns as COVID continues to cause problems for the country in which the virus originated.  This also does not bode well for demand going forward.

For the week ending June 14, the trade trimmed its futures only net short position against all active contracts to just south of 10.7M bales while large speculators increased their aggregate net long position to almost 6.9M bales.

Looking forward, the standard weekly technical analysis for and money flow into the Dec contract remains supportive to bullish.  Weather reports (especially across West Texas) and the USDA’s June 30 Acreage Report are likely to be the major focus of traders over the near-term.

Producers should be comfortable focusing on production in the week ahead.  There is strong support for Dec just a few cents below current prices, and continued hot and dry conditions in Texas are supportive of rallies back to, or through, the mid $1.20s.  We continue to believe that producers 50% priced at current levels should retain the ability to sell at least 25-40% of their crop on rallies later in the summer or on recaps in the fall.

Have a great week!

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    This post was written by Louis Rose