January 21, 2022

• Exportable Goods Competitively Priced
• Demand Remains Extremely Robust
• Most of WTX/OK/KS Territory in Some Degree of Drought

Cotton futures made up for the shorter trading week with more price action. March futures traded higher three of four sessions, posting an 8.54 cent range and making a new life-of-contract high at 124.78 cents per pound, which also happens to be the highest price since July of 2011. Prices pulled back from the high slightly on Thursday, and March futures settled at 122.87 cents, up 603 points for the week. Volume was the heaviest since the omicron sell-off in late November as traders rushed in to buy new highs. Open interest climbed 2,545 to 250,170 contracts.

Outside Markets

Stocks had a rough week as the stock market began to price in growing chances of rate hikes this year. Bond prices are reflecting either bigger hikes or a total of four hikes next year as the Federal Reserve aims to combat inflation. Technology stocks continued to bear the brunt of the selloff as those stocks held the loftiest valuations. Commodities have been brilliant by contrast. While major stocks indices have fallen 2-5% over the last week, the Bloomberg Commodity Index is up 1.4%. The only commodities to trade significantly lower this week have been natural gas and soymeal. The USD has also been relatively flat versus major trade partners, helping to keep U.S. exportable goods, including cotton, competitively priced. Tightness among other major cotton exporters has also supported U.S. cotton, with Indian and Chinese cotton prices trading well above U.S. levels.

Export Sales

Export demand was strong again last week. Exporters made net new sales of 273,000 Upland bales and 3,800 Pima for delivery this marketing year. On top of that, mills also contracted to buy 139,200 Upland bales for next year. With another 52,800 bales of optional origin (i.e., sales that a merchant could choose to fulfill with some other origin like Brazilian cotton), demand remains extremely robust. Weekly shipments moved above 206,000 and will likely continue to strengthen for the next few months in line with the normal seasonal pattern. Delays and frustrations continue to plague shippers trying to execute the high volume of unfulfilled sales.

Weather and New Crop Outlook

It is far too early to write off the West Texas crop because of drought, but there are clearly reasons to be worried. Coming off of the warmest December on record, most of the West Texas, Oklahoma, and Kansas cotton territory is in some degree of drought. Additionally, even though winter is normally dry here, there has been a large precipitation deficit that still bites. From a global point of view, much of the regional dryness has been driven by a La Niña event that will hopefully break apart before the May showers are scheduled to arrive. Unfortunately, there are only small and temporary chances of a break in the drier-biased pattern for the next few months, leaving little chance of subsoil moisture improvement before planting. While there are still months to go, the prospects of larger plantings and lower production are not encouraging. With Southwest production so uncertain, we have the makings of a “weather market” in which forward prices react quickly to forecast precipitation (or its failure to materialize).

The Week Ahead

With less than three million bales of the U.S. crop left to class, attention is shifting even more from arrivals and sourcing to execution and shipping. Shipping is still horrifically difficult, and is soaking up a lot of merchants’ time, energy, and margin. But as far as the market is concerned, the weekly Export Sales Report and weekly Cotton-On-Call reports are the central focus for the week ahead. Whether mills are making progress on fixations and merchants are making progress on shipments will be carefully watched.

In the Week Ahead:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call