The short covering rally suggested last week was more than anyone could have dreamed. December jumped all the way up 87.87 cents before settling the week at 86.93.
For all intents and purposes, the 2022 December contract garnered four consecutive limit-up days. Red December jumped some 900 points on the week, touching a high of 79.15 and settling at 78.37. That was a historic short covering rally. Thus, the cotton market reinforced another of its great lessons: markets always overreact to the downside. Remember too, the cotton market overreacts to the upside as well, but an overreaction to the downside is typically more overwhelming.
The point is that this rally has likely already given us more than we should expect, so do not be disappointed if it plays out for now in the 88-cent area. Yet, the rally did serve the market’s primary purpose of creating a price equilibrium and of washing out the weak sellers looking for easy speculative gains.
However, let’s not forget that cotton’s struggle with the demand side of the market will still limit the rally. The rally has once again shut off the demand spigot. Mills have run for cover. The market reeled in the overzealous speculators and should be expected to back off ever so slightly and reach lower to uncover new textile mill business. Expect the December contract to trade between 84-92 cents as it enters its expiry period. The new crop December will be slow to move higher but should have a move to 85 cents by March with a higher move during the post 2023 planting season.
The short covering rally was born with the news that Chinese domestic industrial firms would be forced to send foreign employees back to their native countries unless the country loosened its Covid-forced closures. Thus, China began to lift its closures once Apple locked out 200,000 workers at a Chinese work compound. With industrial workers returning to work, textile mills were free to reopen, pumping some life into the already constrained cotton export sales market. Yet, as referenced, demand will continue to limit further price improvement.
The market did receive a psychological boost from the U.S. weekly export sales report. The report, lagged a week from actual sales, showed net sales of upland at 191,800 bales. These very strong sales were not surprising in that they occurred with prices under 77 cents. That is to say, demand is good if the price is low. At 75 cents, cotton is very undervalued.
Next week’s sales report should also reflect relatively strong sales as most of the sales were made when prices were between 72 and 75 cents. The primary buyers were China and Pakistan, with Turkey and Vietnam also in the market. Shipments were destined primarily for China, Bangladesh, Mexico, Pakistan, and Turkey.
Too, given last week’s prices, textile mills were very active with price fixations, with 431,700 bales fixed on December futures. Thus, mills have continued to follow the market with lower and lower fixations (just as we like to see growers selling into a higher and higher market).
We continue to note the growing imbalance between on-call sales and on-call purchases registered on the March, May, and June 2023 contracts. This does not imply that prices for those contract months in 2023 will be as high as prices were for the same months in 2022, but it does suggest that the old crop 2023 contract months should find support from mill fixations.
New crop prices rebounded with the same vengeance, albeit with less vigor as old crop prices. The December 2023 futures contract settled the week above 78 cents. Cotton, vis-a-vis other crops, should not be expected to hold 2023 planted acreage even with 2022 plantings. However, as December 2023 prices push closer to 85 cents, less and less acreage will be lost. Many growers will need 90 cents to keep their planting near equal to 2022 plantings. However, 85 cent December futures will satisfy many low-cost growers.
If the new crop December contract can move to 85 cents, then 2023 plantings could climb to 10.75 million acres – a million more than I see now.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: Cotton Grower