Thompson on Cotton
Posted : January 25, 2022

Thompson on Cotton: Expect New Highs, Greater Volatility

January 24, 2022
By Jeff Thompson, Autauga Quality Cotton

Cotton prices posted gains for yet another week, but not quite with the pizazz of those prior. March futures closed at 120.75 for a gain of 105 points while new crop futures settled at 98.85 for a gain of 202 points.

Could this be the tapping of brakes in an overbought market primed for a correction? It would not be a surprise considering the torrid pace we’ve been on. Though new highs are likely, one can expect greater volatility over the coming months.i

Our current crop optimism is based on strong demand coupled with support from managed funds and trade short covering. The funds now hold a net long position of 7.7 million bales, up slightly from the previous week.

On call mill sales remain relatively unchanged at 12 million bales with a large portion of this based March representing a lot of buying power over the next few weeks. However, with a smaller volume-based May, look for price volatility when March goes off the board.

Last week’s export report was good with combined current and new crop sales exceeding 400,000 bales for the second consecutive week and shipments hitting a marketing year high of over 200,000 bales.

Our new crop optimism centers around continued strong demand and shorter supplies. We see little change in U.S. planted acres for 2022 as high input costs will keep them in check. The only planting intentions number currently available is from a survey conducted by Cotton Grower magazine which projects planted acres to be 12.5 million compared to last year’s 11.7 million.

Of course, we all know it’s not planted acres but rather harvested acre and yield that really matters. Using their regional acre numbers, a five-year yield average, and a five-year abandonment rate, you get a U.S. crop of 18.1 million bales only slightly higher than USDA’s estimate for the 2021 crop.

Given current demand and an improvement in supply chain disruptions, this can easily be absorbed by the market without adding to ending stocks.

Obviously, the common denominator and greatest influence on prices going forward is demand. Here is where we begin to feel uneasy.

As U.S. consumer prices reach their highest level in four decades and those of Europe are at a 30-year high, a change in consumer behavior is inevitable. In 2021, consumers paid $3,500 more for the same goods and services purchased in 2020. However, this was buffered by an influx of government stimulus money which created demand, increased savings rates, and lowered personal debt.

With the federal spigot now turned off and consumer confidence levels declining, will the demand for cotton do so, as well? Retail clothing sales in December were down 3.1 percent from that of November, but up 29.5 percent on the year.

With oil prices at a seven-year high and grocery prices significantly higher, consumers will be faced with some tough decisions when considering fuel and food are essentials but that trusty pair of blue jeans, though tattered and torn, can be worn again.

Where to from here? We have enjoyed this ride and will continue to do so as far as it takes us. Even so, we can’t dismiss a change in consumer behavior or the market effect geopolitical confrontations such as the Putin-NATO standoff could have.

If you are fortunate to have some current crop unpriced, thank the classing office then sell. Gamblers would be better served using call options but why absorb their high cost with cash prices at levels rarely seen. As for new crop, though new highs are likely, current prices yielding nearly $500 a bale will go a long way in covering increased input costs.

We at Choice Cotton would welcome the opportunity to assist you in marketing your 2022 crop. Simply call us at 334-365-3369 to discuss a host of marketing strategies we can offer.

 

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