By Jeff Thompson, Autauga Quality Cotton
Russia’s intensified efforts to occupy Ukraine, despite valiant homeland opposition, is casting growing economic uncertainties around the globe. Since the invasion began, commodity markets have been trading on the headlines of the day, last week being no exception.
However, all sectors have not been affected the same with grains and energy futures benefiting, as industrial futures and those closely associated with the economy such as cotton are taking a serious hit. As a result, wheat is trading at a nine-year high, corn at an eight-month high, and soybeans at their highest level in 12 years.
Conversely, current crop cotton (May) has lost over ten cents since the crisis began closing last week at 116.42 losing 221 points. Fortunately, new crop (December) has fared better finishing the week nearly unchanged at 100.65.
In the short term, expect this disparity to continue as new crop garners more support given the increasing concern production may fall even shorter at meeting demand. Over the past few weeks, the spec community has been slowly liquidating old crop long positions while in turn increasing their new crop long position.
Our U.S. economy, once thought to be weakened with the troubles in Europe, is still expanding. So much so, Chairman Powell told a Congressional committee last week the Fed still had plans to raise interest rates at their March meeting. In addition, unemployment fell to 3.8 percent with over 600,000 jobs added in February. The result has been strong demand in the face of short supplies, the perfect recipe for inflation.
Worse yet, these inflated prices have been further amplified by the ground war in Europe. Most notably, fuel and energy prices have skyrocketed, often increasing ten cents or more in a day at the pump. Not to sound like a broken record, but such conditions will eventually reign in consumer spending with apparel and home furnishings sales suffering first.
On the positive side, export sales have yet to reflect this as combined current and new crop sales exceeded 400,000 bales for the third consecutive week. Though slightly down from the previous week, shipments of 365,000 bales came in above the four-week average.
Also, droughty conditions in the Southwest seem to be extending eastward at present. This calls the 2022 production into question for abandonment is likely to be higher than in the recent past. And, although still weeks away from planting, we could see cotton losing planted acres to grains as their prices are significantly more competitive and production costs are cheaper.
Where to from here? We keep comparing 2022 crop futures to the 2011 crop as their movements have mirrored each other for months. That being said, a look at the accompanying chart comparisons would lead us to believe the best pricing opportunities going forward lies between now and May futures expiration.
Anyone who has not priced a portion of their 2022 production shouldn’t let the opportunity to do so above a dollar allude you. There is too much outside noise to risk it. On Thursday, the monthly WASDE report will be issued. Traders will be watching consumption, production, and subsequent ending stock numbers closely for any sign of weakening demand.
In addition, they will be doing the same with Thursday’s weekly export sales report. The March-May window has historically been the time of price highs. Keep this in mind when managing price risk.
With current prices at levels rarely seen, don’t let where they have been blind you to the fact geopolitical issues seem to be far more in control of the market than fundamentals. With no diplomatic resolve in sight, we may be dealing with the fallout from the Russian invasion for some time.
Source: Agfax