December 17, 2021

• Federal Reserve No Longer Sees Inflation as Transitory
• Demand for U.S. Cotton Still Healthy
• Traders Looking for Confirmation of Continued Rally

Until Thursday, trading volumes in the futures market had been dwindling to their lowest in months. March futures prices were confined to a relatively tight range from 105.45 cents per pound to 107.82 cents over the last week, and there was no indication that the market intended to do much but move sideways. All that changed on Thursday as a combination of outside markets rallying and strong export sales (more on both below), helped to fuel a rally. March futures settled at 109.68 after touching limit up on Thursday, making for a gain of 309 points for the week. Open interest lost another 2,390 contracts to hit 232,578.

Outside Markets

Markets received a great clarification this week. Inflation figures from both the consumer and producer price indices continued to weigh on markets and the great question had become whether and how the Federal Reserve will take policy action to contain inflation. Beyond that question was concern of whether or not the economy could afford higher interest rates going forward, especially given the risk of the omicron variant causing economic disruption. Wednesday’s Federal Open Market Committee clarified the first question, in that the Fed no longer sees inflation as “transitory”. It is accelerating the wind down of its monetary injections and foresees three rate increases in 2022. Increased clarity and certainty were enough in themselves to cheer the markets on Wednesday, but the continued trend of better than expected initial and continuing jobless claims, in addition to higher-than-expected housing starts, seems to have solidified the market’s view that people will still need more goods in the coming year. Other Central Banks also began to tighten their policy and the U.S. Dollar actually ended the week lower, providing a little more tailwind to commodity markets.

Export Sales

Demand for U.S. cotton is still healthy, judging by the net new sales that exporters reported. For the week ending on December 9, shippers reported 286,400 bales of Upland sales and 700 bales of Pima. Of the 17 markets making new orders, China was the largest (101,700 bales), followed by Pakistan (52,200), Bangladesh (35,900), and Turkey (22,000). Shipping pace is still slower than most market watchers would like at 139,900 bales (Upland and Pima combined), but the pace is rising. Although sales were not a record, they were far above average for this week of the marketing year, and served as some confirmation that cotton prices did not fall because of a lack of demand.  

The Week Ahead

With the market breaking out of the last several days’ range, many traders will be looking for confirmation that prices will continue to rally. Expect a continued close watch on export sales and shipments, along with more attention to how the broader commodity space trends. Macroeconomic risks from the omicron variant or international political frictions are still being monitored, too.

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 2:30 p.m. Central – Cotton-On-Call