By Jeff Thompson, Autauga Quality Cotton
It came as no surprise that USDA reduced cotton acres for 2021 in its highly anticipated planted acre report. They now project 11.7 million acres will be planted to cotton. As predicted, this did not meet market expectations causing grain prices to surge at the expense of cotton which lost nearly three cents on the day of the report.
Nevertheless, cotton was the beneficiary of a change of heart amongst traders last week as new crop cotton prices rebounded to close at 86.97, only 21 points shy of where it began the week. This market recovery is viewed as very favorable. A three percent decline in acres, albeit smaller than anticipated, was not worthy of a one day 200 point plus selloff.
One must think some of this may have been brought on by crop improvements in West Texas and Oklahoma. The fact that the supply side is still much in question this early in the game while demand has the potential to strengthen served to sway the minds of traders.
Whether we agree with the USDA or not, it will be the acre number traded going forward. Attention now turns to ever-changing yield estimates and final acre abandonment. When using the high and low of both factors over the past ten years, the 2021 crop could be as large as 19.5 million bales to as few as 13.5 million.
With West Texas now resembling a tropical rainforest, expect abandonment to be significantly lower than the average. In addition, with 52 percent of the U.S. crop rated good to excellent compared to 41 percent at this time last year, yields have the potential to be above average.
Tropical Storm Elsa became the earliest fifth named disturbance in recorded history which should serve as a reminder much lies ahead before this crop is in bagging and ties. All things considered, we see a crop somewhere around 17.5 million bales, the size of which should easily be absorbed into the market considering carry out to be less than three million bales.
As for demand, the picture remains bullish. Last week’s new crop export sales were good at 134,000 bales with Mexico and Bangladesh the primary buyers. China’s first purchase of new crop since early April of this year was viewed as a positive considering they have cancelled sales for the past two weeks.
Shipments improved with 284,420 bales exported, 10 percent ahead of the pace needed to meet the export estimate. The consumer sentiment index rose in May to 127.3, only slightly below its pre-pandemic level of 132.6. Consumers, drunk with government stimulus money and lower debt, seem willing to overlook higher inflation and pursue their penchant for spending.
It’s currently estimated there is 3.5 trillion dollars more in liquid assets among consumers than was there prior to the pandemic. Such purchasing power can buy an abundance of t-shirts. Nonetheless, runaway inflation must be seen as the biggest threat to demand.
It can not be described as temporary when manufacturers across the board from apparel to distilleries are no longer absorbing higher production costs but rather passing them along to their customers. At some point, the consumer will begin prioritizing spending. Why, just this past week the price of my favorite bottle of bourbon went up $10. And no, I did not walk out empty handed.
The point I am making though is this buying spree is likely to continue until the consumer realizes that 3.5 trillion dollars now only buys a percentage of what it once did.
What lies ahead? In the absence of a trigger, additional attempts to break through 88 cents will face formidable resistance. Fortunately, we feel strongly the mid 80’s will provide firm support thus look for the market to stay range bound as we see how this crop plays out.
Upon our Nation’s birthday, I would like to take poetic license to share some comments indirectly related to cotton. Almost 250 years ago when exiting the first Constitutional Congress, Ben Franklin was asked what type of government was decided upon? He stated rather simply “a republic, if you can keep it.”
Now, of all times, we need to heed these words. Dismissing skin color, political views, or sexual preference, we must stand united as Americans and foster an understanding and love for each other. This, too, must be demanded of our elected officials who seem driven to divide our country for the sake of a reelection vote.
For the betterment of our country, we must return to political compromise from that of political extremism. Let Lincoln’s words serve as a reminder, “a house divided against itself cannot stand.” Rest assured, our adversaries wary of this are poised to exert their dominance. For just last week, in a speech commemorating Communism’s 100th birthday, Chairman Xi stated anyone attempting to bully China will have their heads bashed and bloodied by the Great Wall of Steel. Somewhat disparaging coming from a trading partner. God Bless the USA!