There must be a song or love story about a “September to Remember,” but nothing comes to mind.
Historically, there have been crashes or near crashes in the equity markets during years past, but this one will be long remembered as cotton succumbed to more bearish pressure than any other commodity contract I can recall. Too, the macro markets experienced a record retreat.
Cotton prices were down 720 points on the week. They were off a staggering 27.87 cents during September. The past four-month downfall was 37.11 cents.
The word unbelievable comes to mind, but we best believe the truth.
Too, the price collapse occurred as the market was filled with news of major crop failures in the U.S. and Pakistan, along with declining crops in Brazil and India. Instead, the market concentrated all its massive bearish energy on the downturn in retail activity and the ever-increasing inventories of yarn and apparel, as well as the widespread deep discounts at the retail level.
Hopefully, the cotton contract can withstand a fall to 80 cents and attempt to rebuild from there. I repeat my past broken record comments of the disappearance of demand – a theme unfortunately I have harped on too long. Thus, until a potentially smaller than expected world crop might surface, the December contract appears locked in a trading range between 78 and 90 cents. Demand must wait on another marketing season.
In prior weeks, we discussed the weakening and troubling economic news and will not belabor those points. Simply, the very weak U.S. and world economies will be with us another nine to 18 months. Some say longer, but the sooner the U.S. comes to reckon with even higher interest rates, then the sooner the economy can dig itself out of this murky mess, and the typical supply and demand numbers can come into balance. Like cotton futures, the Dow, NASDAQ, and S&P were all down about 13% over the past four months.
Granted, a smaller world crop is likely on the horizon, but the market must first deal with the demand collapse. As the market approaches the release of the October world supply demand report, trading will now become more stable and again two-sided, as opposed to just being down, down, down. The afore mentioned 78-cent price support should support prices as the U.S. crop size remains under pressure, but Pakistan will likely be the only consistent buyer.
Export demand continues extremely poor, as weekly sales totaled only 30,200 bales of upland cotton. Only nine countries were in the market for U.S. cotton last week, and only Pakistan purchased more than 9,000 bales. In fact, had it not been for Pakistan, weekly export sales would have been negative, owing to cancellations of past sales to other countries.
Export shipments appear friendlier to the market, as 187,900 bales of upland cotton were shipped. Yet, that is just an “okay” number, and the market would find it more favorable to prices had shipments been at least double that number. Thus, shipments also confirm the weakness in mill demand.
However, shipments were made to 18 countries with China taking 46,800 bales; Vietnam, 29,600 bales; Turkey, 27,300 bales; Pakistan 21,000 bales; and Mexico, 14,700 bales. In better times, each of those countries would take about double that amount.
Cotton continues to be very undervalued as compared with other commodities, especially agricultural commodities. The market is signaling to growers that they should plant oilseeds and grains instead of cotton. Thus, cotton prices will have to increase to meet mill demands for the 2023-24 needs.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
