By Jeff Thompson, Autauga Quality Cotton
Like a tumbleweed in the West Texas wind, cotton has traded sideways between 91 and 96 cents since mid-July. Closing the week at 96.13, Friday’s strong finish was a breakout of sorts. The day’s triple digit gain was quite a feat considering the host of unfavorable news.
The bear was poked when House Chair Pelosi defied China’s warnings and visited Taiwan. Our fears were met as export sales saw its largest volume of cancellations. Finally, a drop in unemployment will likely encourage the Fed to remain hawkish with interest rates in September.
The recent price consolidation is indicative of a market short of sellers. The managed funds net long position now stands at 3.1 million bales. This is 10 million bales less than in October and their lowest net long position since August 2020. Thus, they have little left to liquidate and inflationary pressures should curtail them from going short.
The market’s reaction to Thursday’s terrible Export Report is another sign of a lack of sellers. Net sales for the three combined marketing years were a negative 24,300 bales as a result of the largest number of cancellations to date, 132,400 bales. Normally, this would have been followed with a limit down move, but, instead, the market gained 19 points.
There are currently two battles going on amongst traders with opposing forces holding each other at bay. First, given such high production costs, cotton prices must remain near current levels or risk losing planted acres to other commodities. As opposed to those who see cotton products as discretionary items, the purchase of which subject to current economic conditions.
On another front we have those who see sales cancellations as a sign demand destruction may be worse than once thought versus those who view production shortfalls in Brazil, India, Pakistan, and the U.S. more of a threat to cotton’s balance sheet.
Where to from here? Barring any outside noise, look for cotton prices to trade within a similar range while awaiting which side gains the upper hand. This could take weeks or months. Presently, the Southeast crop looks scary good, but continued good weather over the next couple of months is critical to getting it into bagging and ties.
In the Southwest, further abandonment is possible and, as pivots are shut off, yields on harvested acres will fall below average. It still appears we are looking at a U.S. crop of no more than 14 to 14.5 million bales with world production significantly less, as well.
With the release of the August WASDE report this Friday, the market will be closely watching for any changes from the previous month’s estimates, especially where consumption is concerned. Also of note, we will see if inflation has weakened as the Consumer Price Index Report is announced on Wednesday.
Finally, we must never discount outside noise such as an itchy trigger finger by a Chinese pilot or a host of other geopolitical factors currently in play.