The market remained quiet throughout the week until Thursday when we saw yet another sell off, the origins of which remain unclear. The May 21 contract closed at 77.95 c/lb, down 243 points in the week. 

The days of government austerity are truly behind us for now as we continue to see money trees shooting up in all major economies. Notably a new $2 trillion infrastructure plan in the US with the long term goal of achieving a more productive, efficient and green US economy. The bill has to be approved by both sides of the political spectrum, which will be tough. In Europe there are rumors that the ECB is considering doubling its loans to member states, which would take their loans to 1.5 trillion euros since the beginning of the pandemic. In such difficult times, governments are willing to step in to keep their economies afloat. 

The banking sector came under scrutiny again this week after the collapse of family run Archegos highlighted some potential cracks in the banking sector. Archegos were making derivatives bets with multiple global banks at nearly 5 times leverage, as their bets took a turn and the margin calls increased the company went under. The lack of transparency with whom these banks were trading has caused concerns and we hope this is a one off rather than it being systemic within the industry. 

After the first lockdown of March 2020 and the widespread cancellations of garment orders, it seems that trust has broken down between the big brands and their suppliers. Bangladesh alone suffered cancellations worth $3.7 billion back in March 2020. It is estimated that there are still $40 billion worth of payments outstanding to mills globally. In such an environment, thirteen associations have come together from across the world including Vietnam, China and Bangladesh demanding minimum terms from the brands, that they shall seek to enforce globally. This includes a maximum 90 day payment term and an end to discounts after orders placed. Time will tell if the brands play ball. 

This week Mali announced that cotton farmers would be paid 280 FCFA/KG for the 2022 season, in order to motivate farmers to resume planting cotton. The government also announced a major increase to production for 2022, at just over 300k mt of lint, up from the 60k mt of lint in 2021. The strengthening dollar helps West African suppliers and we shall wait to see if other producing countries follow suit with higher prices to farmers. 

On Wednesday it was announced that Pakistan would allow cotton yarn, cotton lint and sugar in from India. On Thursday, a U turn was announced and the cabinet rejected the idea, meaning Pakistan cannot take advantage of cheap Indian cotton stocks. 

The USDA this week estimated US cotton acreage at 12 million, down less than 1% compared to 2020. This was largely expected. It is still early days, and 40% of US cotton comes from Texas which is still experiencing a severe drought. Prices are also weakening in cotton whilst improving in Soy and Corn, so between now and plantings a lot can change and as things stand it is easy to see how cotton acreages could be further reduced. Not only acreage but also abandonment and yields will have to be watched too as the drought and possible storms can change the picture very quickly. Based on the USDA acreage the cotton production in the US is estimated at 17 million bales for new crop. 

Such continued weakness in the cotton market has had traders scratching their heads. Undoubtedly the COVID situation and the effective closing of many economies around Europe will be playing on investors’ minds. That aside, yesterday the DOW Jones achieved its highest level ever and the S&P 500 is now up 7% in 2021 and 80% since the start of the pandemic. Investors remain very bullish the US economy, further reinforced by today’s report that the US added 916k jobs in March, the highest since August last year. 

Cotton however has taken a different direction, even in the face of a fundamentally bullish global picture. Clearly the specs have control of pricing and it would take a brave man to bet against them at this stage.