By Jeff Thompson, Autauga Quality Cotton
Over the past four weeks, March futures have traded in a range from 89 cents to a low of 70 cents. Swings of this magnitude are indicative of a reactionary market. One that moves up or down in response to the news of the day more so than fundamentals. It was hoped a holiday shortened trading week would be just the thing to bring a little semblance and order. However, it was not to be. The week began with limit down trading on fears of further Covid lockdowns in Shanghai China, home to 24 million people and one of the world’s largest seaports. Despite a small mid-week rally, Friday’s horrible export sales figures sent the market reeling once again. Giving up 360 points, March futures closed at 80.18, finding itself in the middle of its four-week trading range.
We’ve said time and again the lack of demand for cotton is an anvil hanging over the market and the primary reason for its sharp price decline. Anyone blind to this fact was hit squarely between the eyes with the release of last week’s exports sales numbers. Net current crop sales were a negative 111,240 bales due to an extraordinary number of sales cancellations. These cancellations totaled 138,100 bales and were primarily from China. Being told by textile industry representatives business has declined to the point where many mills are running at half capacity and yarn inventories are two to three times higher than normal , sales cancellations shouldn’t come as a surprise. The fact we hadn’t seen a large volume of cancellations was the one vestige of hope we were clinging to. Sadly, this confirms the lack of demand for cotton is real.
Look for prices to be greatly impacted as USDA revises their numbers in the months ahead. Currently, they estimate world consumption to be 115 million bales, certainly way out of line with current conditions. Some better-informed industry groups project it to be as low as 108 million bales. As downward revisions in consumption are made, ending stocks in turn increase. Though ending stocks aren’t currently at bearish levels, they become so when the large volume of yarn inventories is added as they both constitute the supply chain.
Where to from here? Ultimately, for prices to rebound economic conditions must improve to instill consumer confidence. Even then the rush to purchase apparel may be slowed as it appears after accounting for gas, housing, and groceries consumer discretionary spending is being directed to dining, travel, and services rather manufactured goods. Thus, the worst may be yet to come as the market searches for a price level which will generate demand.
In recent weeks the specs have been covering shorts and adding slightly to their long position which stands a net 1.1 million bales. This has led to a few brief rallies. Now that March has become the cover month, the specs have a three-month reprieve from having to cover any shorts. Also, with the outlook for demand as poor as it is, don’t look for them to significantly add to their long position. At the same time, growers seem to be content to sell on call rather than price at these levels. This tug of war should keep the market trading in a narrow range. Keep in mind though specs can hold out indefinitely, growers cannot.
Source: Agfax