Cotton is back in the doldrums, if you call 120-140 cents the doldrums – a dull quiet market that has no reason to go down but continues to hint of higher prices.
The market is attempting to transition from the 2021-22 marketing year to the 2022-23 marketing year. Once the July contract goes First Notice Day on June 24, the new crop 2022-23 begins and the old crop goes in the history books. July is now the lead contract.
The next nine weeks of trading will spotlight the speculators’ battle with textile mills. Mills, for all practical purposes, will be going hat in hand to the speculators asking them to let them out of the trading debacle mills themselves created. In the not-so-distant past, Chinese mill executives were arrested after such a mess and reported by the press to have been executed. The coming weeks should be very explosive as mills fix prices against on-call sales.
Too, the moisture situation, or lack of moisture, continues to dominate the headlines in West Texas, the Rolling Plains of Texas, and Oklahoma, as well as the New Mexico and Kansas cotton producing areas. The worst drought on record continues, and the U.S. National Weather Service released a forecast that indicates the drought will spread. Further, the Service suggests even local rain showers will be so limited as to be all but useless for cotton production – words and phrases that have never been used before.
Yet, this is not the Memorial Day weekend. Thus, there is still time for beneficial moisture to fall over an area that accounts for about 45% of the U.S. cotton production.
July has the potential to climb as high as 150 cents. Mother Nature controls the new crop December futures contract, and prices are focused almost entirely on the moisture situation in the Southwest U.S. December futures could climb as high as 150 cents between now and August.
As bullish as mill on-call sales have been the past seven months, they rose to new heights this week as the on-call sales versus on-call purchases ratio jumped from about 9.1 to 15.1 on the July contract (May is all but a memory but, including May and July, the ratio is 16.1 to 1.) This provides statistical evidence that mills procrastinated all year in executing price fixations and will now pay dearly for cotton. The data tells us that mills even added 433,900 bales to their on-call portfolio just this past week, despite prices hovering near 140 cents.
The ratio is at a historical high and promises that July futures trading will be very volatile. The data suggests that mills must buy futures contracts equivalent to 6,311,100 bales between now and June 24. Conversely, known selling of futures during this same period is only 420,300 bales. Limit up trading days are in front us. Combine this with the drought facing new crop contracts and one sees that cotton trading will continue to attract more speculative funds into May and June – likely longer.
It should be noted that some suggest the on-call report should not be used and is misleading. Let me say, do not be misled by those saying such. They simply lack a historical perspective of the report and/or are doing nothing by trying to hide data. They want to mislead others and are against transparency in the marketplace. I also note that it is not unusual to attempt to hide data or couch data behind a mask.
Growers are cautioned to take note of any entity that tries to squelch the data. If those attempting to hide the data are not scared, they will not attack its use.
The rise in prices above 140 cents has all but cut off any sales of cotton. Net export sales for the week were a marketing year low of only 50,500 bales of upland. Cancellations included 13,500 bales from India and 9,600 bales from Turkey, among others. Shipments totaled 367,100 bales of upland, not enough to reach the USDA export projection of 14.75 million bales of upland and Pima. Exports may fall to only 14.5 million bales, which would push year-ending carryover to 3.8-3.9 million bales.
Cotton is not trading, but mills must trade themselves out of a fiasco. They are trading past commitments and promises. The 150 cent forecast stands.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: Cotton Grower