June 24, 2022

• Recessionary Worries have Driven Inflation Expectations Lower
• Export Sales Report Lacked Breadth
• Southwest Crop Baked in the Sun

Caught up in a broader selloff that affected all commodity markets, cotton declined sharply from last Thursday’s close. While the July contract only fell 721 points as it approached its notice and delivery period, December futures fell 1,722 points to finish the week at 102.01 cents per pound, their lowest level since March. Daily trading volumes exploded to record values for this time of the year, and open interest plummeted as traders panicked to liquidate long positions. Thursday to Thursday open interest dropped 15,478 to 183,753 contracts.  

Outside Markets

As mentioned above, commodities were a terrible loser of an asset class this week. Nearly every constituent of the Bloomberg Commodity Index was down over the past five days, with Gold and Coffee providing the only exceptions at +0.4% and +.2% for the week respectively. The index itself was down 6.6% and cotton was among the biggest losers, only finishing ahead of Natural Gas and Soybean Oil at -13.5% for the week. It seems that rising concern that a sharp recession is inevitable have driven most of the changing mood. The recessionary worries have also driven inflation expectations lower, spurring bond buying as major investors and banks reduce their bets that the Federal Reserve will have to continue to be quite as hawkish as they have communicated lately. Stocks were also slightly higher over the last few sessions, perhaps reflecting a similar view that the Fed will not in fact need to be so drastic. Cooling inflation would certainly be good news, but the market needs confirmation. Macroeconomic data releases are sure to generate volatility over the next several weeks.  

Export Sales

Despite the market being 20 cents higher than the current level, U.S. cotton merchants were still able to book another 16,200 bales for shipment this year and 277,300 bales of Upland for next year (after August 1). Unfortunately, this week’s report also lacked breadth as did last week’s. China bought 243,700 of the total, leaving just under 50,000 bales to the other nine countries that were net buyers. On the other hand, shipments remained very strong for this time of year at 377,500 bales exported. Aggregate demand for U.S. cotton has not waned, but it is too concentrated in China for merchants to feel comfortable. Traders will be closely watching next week’s report to see whether lower prices were able to broaden demand to more markets. 

Weather and Crop Progress

Although Kansas had a helpful rain, the rest of the Southwest crop continued to bake in the sun all week. It looks as though the adjusters are already visiting most of the dryland acreage in the Southern High Plains. Even areas that had received significant rains a few weeks ago are starting to struggle. In fact, most of the Cotton Belt has been unusually dry over the last two weeks, and there are still above average temperatures and below average rainfall forecast for the next few weeks. There is some hope that the Southwest monsoon puts some moisture onto the Texas Panhandle over the next few weeks, but it looks unlikely to help the Southern High Plains where it is needed most. Coastal areas have improved chances next week, too. Sadly, the seasonal outlook for high heat and low rainfall is unchanged. Tropical storms are the best chance of introducing moisture into the middle of the country.

The Week Ahead

With July futures having entered their notice period (for making delivery of physical cotton against the futures contract), December futures will have fully come into center stage. So, aside from the usual Crop Progress and Condition and Export Sales reports, traders will be focused on the USDA’s June Acreage report, which will be released Thursday at 11 a.m. Central Time. The June Acreage Report will serve as the first update of the USDA’s planted acreage for cotton since the Prospective Plantings Report at the end of March and thus has a direct impact on what the USDA’s production expectations will be in July.

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
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 11:00 a.m. Central – Acreage Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call