New crop cotton continued to separate itself last week with December futures gaining 480 points as May futures declined 214 points. The latter was not unexpected as the big brokerage houses began their roll period. December’s rally, on the other hand, was attributed to worsening weather conditions in the Southwest and renewed spec interest. As a result, new intraday trading and settlement highs were established at 115.98 and 115.48, respectively. Even more impressive, this was done on the heels of less than favorable export sales and supply/demand numbers.

Combined current and new crop export sales of 141,310 bales were down 61 percent from the previous week. However, weekly shipments were the highest they’ve been all year at 467,660 bales. Tempering the excitement over shipments, sale cancellations were their highest to date. It’s hoped shipment delays, along with an inverted market, led to this rather than declining demand. Nevertheless, traders will be watching these numbers closely in the weeks ahead.

The USDA supply/demand report for April has U.S. production unchanged at 17.6 million bales though rather unrealistic considering the arid conditions of the Southwest. There were also no changes made to exports, thus U.S. ending stocks are projected to remain at a very low 3.5 million bales.

Globally, however, the numbers were slightly more bearish. While projecting larger production and lower consumption, world ending stocks were raised 800,000 bales to 83.3 million. Though this is a significant increase from the previous month, it’s four million bales lower than last year and almost 14 million bales lower than 2020.

Where to from here? Whether it’s the exhaustive length of this rally or looming recession, there is an eerie feeling surrounding this market. At such heights, downside risk far exceeds upside potential. A fact amplified as negatives begin to outnumber positives. Inflation continues to be our biggest threat with its potential to erode the demand for cotton.

Increasing food prices, up 12.5 percent last month, and the escalating cost of energy is sure to take its toll on apparel purchases. It probably already would have if consumers were not still drunk off government stimulus money. In addition, the Fed all but announced future interest rate hikes would be much more severe, thus a recession is almost inevitable.

Until there are visible signs of shrinking demand, however, new crop prices still have some life as traders monitor planted acres and crop potential. Also, the mills may look to new crop as a cheaper alternative to current crop prices. Indicative of this, the July – December spread narrowed again last week by five cents and now stands at 15. 5 cents. December 2022 futures has often been compared with December 2011 futures as the last time prices were above a dollar for any length of time.

Also, their charts have mirrored each other to the point that it was thought DEC22 would top out as did DEC11 when May futures expires. However, a closer look turned up some key differences which may allow this bull market to stay alive longer than the 2011 bull market. In 2011, the specs were only 3.2 million bales net long compared to last week’s net long of 7.9 million bales when they added another 340,000 bales. In addition, the trade was 6.8 million bales short in 2011 compared to their net short position of 13.4 million bales last week.

Finally, and most importantly, is the size of the on-call sales volume today versus 2011. Current on call position-based May or July is 8.4 million bales or 60 percent of open interest while in 2011 it was only 4.6 million, a mere 35 percent of Open interest. With the above factors lending support, we may be privileged to a wider pricing window than once thought.