Rose on Cotton – Supply Concerns Continue to Support Cotton Market, Despite Weekly Setback

April 23, 2022 6:51 pm
Published by

Louis W. Rose IV and Barry B. Bean

ICE May cotton gave up 486 points on the week, finishing at 135.85, as the July – Dec inversion contracted to 1669.  Last weekend our models predicted a finish on the week that was to be near unchanged to lower Vs the previous Friday’s settlement, which proved to be correct.  The Dec contract lost 332, finishing at 119.16.

The cotton market moved lower on yet further weakening US export data, US currency trading further above par, the impending notable rise in US interest rates, and dire domestic and world economic concerns.  All these factors spurred further spec long liquidation/profit-taking.  The worsening drought across the West Texas region and mill on-call fixations likely kept the market from falling further.

Domestically, the drought across West Texas, Oklahoma, and Kansas continues to worsen.  Showers materialized over small portions of West Texas early in the week, but no reporting stations reported even as much as a half inch of accumulation.  There is little mention of rainfall in the 10-day forecast.  Planting is resuming across the Mid-south and will probably pick up speed across portions of the southeastern states next week.

US export net sales were a new MY low of just above 54K RBs.  New crop sales were almost 142K RBS while exports were just shy of 382K RBS – well below the weekly pace required to meet the USDA’s target.  Data disseminated last week were not surprising as limited availability of stocks, current prices, building yarn inventories at mills, merchant buy-backs, and sales cancellations continue to limit sales.  COVID infections in China also did not help sales.  With respect to new crop, merchants are apparently willing to commit to a certain level of sales activity, despite very uncertain US production potential.

Internationally, the World Bank has significantly downgraded its forecast for world economic growth this year to 3.2% Vs the previous forecast of 4.1%.  The EU’s annual inflation rate was estimated at 7.4%, which will likely hurt textile consumption from a key region.

For the week ending April 19, the trade held its futures only net short position against all active contracts at approximately 13.5M bales while large speculators reduced their aggregate net long position to around 7.5M bales. 

For this week, the standard weekly technical analysis for and money flow into the July contract remain supportive to bullish, with the market no longer overbought.  The weekly release of US export data, weather reports, and geopolitical developments will likely be next week’s major influencing factors.  At this time we believe the supply side of the S&D equation and lopsided mill-producer on-call commitments are the major factors supporting the market.

Producers are encouraged to stick to the 50% priced via forward contract with insurance and/or put hedges on the remainder of estimated production.  Current levels of volatility and the continuing drought in TX make rallies to or through the 125 level likely, with strong support at the dollar level, reducing incentive to commit past 50% prior to planting.

Have a great weekend!

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    This post was written by Louis Rose