MAY 7, 2021

JULY FUTURES BREAK OUT OF DOLDRUMS

• Treasury Secretary Comments Whipsawed Markets
• Export Sales Report Showed Record Level of Shipments
• S. Planting Progressing at Normal Pace
• Mixed Weather Outlook for Southwest Region

Cotton futures activity was constrained to the lower end of last week’s range for the first few days of this week. Despite a relatively weak Export Sales Report, July futures were able to break out of their doldrums on Thursday, trading as high as 90.89 cents per pound on Thursday and settling at 90.58 cents, up 404 points for the week. Until Thursday, daily trading volumes had been sinking to their lowest levels in several weeks, but volume bounced back as prices moved higher. Last Thursday’s selloff decreased open interest, but traders have been adding contracts since then. Open interest finished the week at 222,454 contracts, a net increase of 772 contracts.  

OUTSIDE MARKETS

Markets were whipsawed by Treasury Secretary Yellen’s comments this week. On Tuesday the Secretary seemed to acknowledge that the U.S. economy could be overheating and that interest rates would need to increase soon to keep inflation under control, which precipitated a minor panic in the markets. The comments were rather quickly clarified in alignment with the Federal Reserve’s view that there is no big risk of raising rates. Stocks cheered the clarification and the Dow Jones Industrial made a new high.

Elsewhere, economic indicators are beating expectations. Europe’s retail sales for March were up 2.7% month over month, despite the difficulties it has had with the resurgence of COVID-19. U.S. initial jobless claims fell to 498,000, and Nonfarm Productivity increased 5.4% versus last quarter, easily beating the 4.3% expected in a survey of analysts. Booming demand fed by government stimulus and continuation of accommodative monetary policy continues to boost commodities. Lumber, grains, and industrial metals continue to lead the charge higher. With inflation expectations at multi-year highs, institutional investments in broad baskets of commodities are lifting multiple markets, including cotton.

EXPORT SALES

The export sales report for the week ending April 29 showed that cotton shippers made net new sales of 63,700 bales of Upland cotton and 11,300 bales of Pima. Sales for next marketing year (shipment after August 1), were 61,200 bales of Upland and 200 bales of Pima. The sales totals were rather disappointing compared to the sales pace earlier this year, but it has to be acknowledged that there is little U.S. crop left to commit. Additionally, the relatively slow sales did not distract traders from the record level of shipments. Shippers exported 481,300 bales, which misleadingly includes 78,600 bales that should have been reported earlier this season. In any case, accumulated exports are the highest ever for this week of the marketing year.

CROP PROGRESS AND WEATHER

There is not much to say about crop progress. On a national level, U.S. planting is right at the normal pace. Planting may be delayed in the central part of the Cotton Belt this week.  Another round of showers and severe storms is forecast for the eastern half of Texas and to continue through the Mid-South, perhaps even bringing some needed rain to the Southeast. The northern Delta was dry to start the year, but has quickly become excessively wet so the rains are not as welcome.

In the Southwest, the outlook is more mixed. We have good chances of precipitation in the Northern High Plains, Kansas, Oklahoma, and Central Texas, with lighter amounts for South Texas. Unfortunately, the outlook for the Southern High Plains is fairly dry, but there is disagreement among the weather models. If rains do come, they seem likely to be in the form of localized storm cells. Winds are likely to be very high, too, and there is a significant risk that evaporation rates will undo recent rainfall.

THE WEEK AHEAD

Weather is still a central concern, but trader attention is pivoting to the May 12 WASDE report which will give the first look at the USDA’s expectations for the 2021/22 balance sheet.

IN THE WEEK AHEAD:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Monday at 3:00 p.m. Central – Crop Progress and Condition
• Wednesday at 11:00 a.m. Central – WASDE
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call