By Jeff Thompson, Autauga Quality Cotton
It took an abbreviated trading week to temporarily slow this runaway bull. Impressively, December futures set new contract highs along with higher lows in four consecutive trading sessions last week. New crop prices settled at 122.48 for a gain of seven cents but not before hitting an intraday high of 124.26.
The rally was across the board as both May and July futures advanced over nine and a half cents. Though still largely driven by spec buying and trade short covering, last week’s rally was also influenced by India’s decision to waive import duties on foreign purchased cotton through early September. As a result, India is projected to import an additional two million bales in 2022.
For yet another week, current crop export sales fell below 100,000 bales. Shipments were a respectable 352,000 bales though slightly below the average needed to meet export estimates by the end of the marketing year, July 31.
Nevertheless, given current demand, there are enough sales registered for shipment beyond this date to seriously reduce U.S. cotton inventories prior to new crop harvest. Consequently, there was little reaction by the market to this report.
Cancellations, a leading indicator of declining demand, will be the focus going forward. Cancelled sales totaled 44,000 bales last week, down from the previous week’s 63,000 bales. Since these were primarily by China, it could simply be associated with their recent Covid lockdowns.
As if we didn’t already know, inflation continues to rise. The consumer price index surged 1.2 percent from February to March, now up 8.5 percent on the year, the fastest annual pace since December 1981. Percentages can sometimes appear abstract, though.
Simply put, inflation is now adding $327 to the monthly expenses of an American household as compared to $296 a month ago. Even so, the consumer is still taking higher prices in stride as seen by an increase in retail sales last month. Continued wage growth, low unemployment, and the tremendous amount of liquidity found in the market is responsible.
Spending has shifted from big ticket items to that influenced by a post-Covid environment. To our good fortune, clothing and accessories were up 2.6 percent for the month of March.
Where to from here? There is a sense the market is currently over bought upon last week’s rally. Friday’s late selloff of over a cent and a half from its high of 124.26 could be indicative of that. Nonetheless, strong underlying support still prevails. The greatest being the large volume of on call sales which remain.
Rather than taking their lumps, mills have decided to play a game of cat and mouse with specs by rolling their positions to July in hopes of stalling for prices to decline. Thus, six million bales of on call sales must be priced and subsequent futures bought over the next two months. Look for specs to stand their ground in the knowledge further rolling is not an option for mills.
Also, with worsening inflation likely leading to a recession, specs will view commodities as a safe play or hedge. For this reason, among others, we feel new crop prices are apt to move higher over the next few weeks. For months now, mills have been making prices in the 1.20 range work.
It was not until current crop prices reached 1.40 that we began to hear they could no longer pass it along. Therefore, barring any signs of demand destruction, December futures has some more upside potential.
With the likelihood of a shorter crop as moisture conditions in the Southwest further deteriorate and cotton inventories all but depleted prior to harvest, cotton fundamentals are incredibly supportive.