Cleveland on Cotton: Patience Paying Off in Summer Doldrums
Aug 02, 2022
By O.A. Cleveland, Consulting Economist, Cotton Expert
Cotton prices blew through the 93-cent price resistance as suggested, albeit much sooner than I expected. Keep thinking patience as prices now look to trade the dollar mark. Beyond that, marketing fundamentals, particularly on the supply side of the price equation, are building an argument for trading to the 108-110-cent level.
However, as quick as the market blew through 93 cents, prices need to sit in the 95-99 cent range just to regroup and not let the market get ahead of itself. Market psychology suggests the dollar mark will find many sellers and slow the advance to higher prices.
It should be noted that the current price recovery is occurring on small volume. Recent trading volume has been only to 13,500 to 17,000 contracts per day – about half of what is generally seen. Thus, the market is truly suffering from the “summer doldrums.”
The health of the U.S. economy and the world economies continue to sit in judgment of consumer spending and the outlook for cotton demand. Certainly, the U.S. consumer is the big engine that drives the U.S. economy. Consumer spending has weathered the inflation curse but could slow now that inflation has still not been checked. The big question is “How long will this near double-digit inflation last?”
It is noted that Washington is considering another billion-dollar aid package; thus, U.S. fiscal policy is on the brink of pushing inflation higher. Therefore, demand could be further eroded and wipe out the supply side price gains the market is currently enjoying.
Personal Consumer Spending, as measured by the Fed, seems to suggest inflation is above 9%, and that metric will have a key role in determining how high/how long the Fed will continue to raise interest rates. Likely the decline in cotton consumption during the 2022-23 marketing season has been accounted for, and price leadership will come for the supply side of the price equation.
Again, as mentioned last week, the U.S. crop is forecast to range between 13.8 to 14.5 million bales. The key determinant is “just how bad is the Texas crop?” The market appears to be trading a crop size below 14.5 million bales. However, U.S. fiscal may torpedo further price gains.
Reflecting the slowing business in Asia as well as the Subcontinent, cash cotton business has slowed to a trickle. The weekly U.S. export sales report showed a net reduction of 2021-22 export sales of 4,000 bales. Weekly sales of upland for the upcoming year (2022-23) were a reasonable 55,700 bales.
Weekly shipments were a bit low at 252,900 bales. Shipments for the year, with data for only some 10 more business days remaining in the marketing year (August 2021-July 2022), indicate total shipments of 13,230,300 bales (USDA data).
USDA will reconcile its reporting with Census data in August, and it is an almost certainty that the USDA export estimate of 14.7 million bales will be met. Based on Census data, the final USDA export calculation may be marginally higher than the current USDA estimate. Reconciling with Census data to date would place exports near 14.5 million bales.
China continues as the principal buyer of U.S. cotton. Total sales are 5,126,500 bales, and some 4,264,500 bales have been shipped.
It was suggested cotton market trading is exhibiting a “dead cat bounce.” That appears to be the position of textile mills. I note that the higher prices go, the more mills choose to delay pricing. I do not view the trading as a “dead cat bounce.” Rather, the market is showing bullish tendencies but only based on supply fundamentals, not demand fundamentals. Thus, the top side of December is likely not much higher than 108-110 cents.
Yet, as mentioned last week, mill trading appears to be setting up for a Spring 2023 price run to higher ground based on on-call sales versus on-call purchases ratios. There will be more days of downside activity, but it is a grower friendly market.
A little more patience.
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