The bear has jumped on this cotton market like no other market in history – certainly no other cotton market in history. Commodity literature is replete with the saying “The trend is your friend.” I have used it a thousand times. Yet, the trend has not been your friend in today’s cotton market unless you are a textile mill.
The cotton market has aggressively moved lower, down a near unbelievable 1,700 points in just 12 days. I would have told you such was all but impossible, and still would. Yet, we see it can happen. On Friday (Oct. 28), the July 2023 contract traded down to 71.75 – a life of contract low and 236 points lower than its first trade ever back in March 2021. There is no clear strong price resistance level now that the 75-cent support was taken out. I don’t see December trading below 72 cents but recall I did not feel the bottom would slip below 78 cents.
Borrowing a phrase from the late Fed Chairman Alan Greenspan, speculators have attacked the cotton market with “irrational exuberance.”
There is one heck of a short covering rally coming for cotton when the speculative funds realize it is time to exit their short positions. The long-only Index Fund rolls have started and will continue for another week, but that is certainly not bearish (Sell December-Buy March). Too, now that the spread between December and March has all but evaporated, there is increasing evidence that there may be a strong taker for the December certificated stocks. If so, that will tell us that there is some market for exports, at least for high quality exports.
Dollar cotton, as much as we love it, has once again proven just too much for the consumer. Demand has simply evaporated. Too, the higher above the dollar mark prices go, the quicker demand evaporates. This week’s collapse in price suggests that demand may be even worse than forecast. Certainly, we have seen very bearish demand for some time, at least as far back as June. Likely, the market is just understanding how bad demand is.
World demand is likely some four to six million bales lower than the current USDA estimate of 116 million bales. World ending stocks, estimated at 88 million bales, could grow to 92 million. World stocks at 90 million bales and above nullify the bullish price impact of U.S. stocks falling to three million bales and below. Current futures prices are suggesting that demand prospects really are that bleak. Yet, prices are likely just catching up with reality.
The Chinese futures exchange, the ZCE, is falling very much in tandem with New York. Domestic Chinese cotton supplies are increasing just as world stocks are increasing, suggesting that Chinese mills have significantly reduced their demand not only for imported cotton but for Chinese grown cotton as well. This concern dovetails with the growing expectation that U.S. export sales are facing increasing cancellations.
A hint of such showed up in the weekly export sales report as China cancelled 23.8 million bales of previously committed export sales. Additionally, another 31.3 million bales that had been previously sold to Chinese mills, while not cancelled, were changed to mills located in Vietnam and other countries. These “destination changes,” as they are known, were to mills essentially owned by the same Chinese business entities but located in other countries. These changes suggest that outright export cancellations are the next step.
Such cancellations spook markets and logically add to selling pressure. The market is telling us that it believes some outstanding export sales to China are, in fact, being cancelled. Thus, the market is swamped with limit down selling pressure. Yet, as noted, now that the December and March contract prices are essentially equal, the potential for a taker of certificated stocks may be all the market needs to solidify a base in the 72-cent area and pursue a very slow retracement back to 75 cents and then to 78 cents.
The December 2023 contract did fall to 71 cents but was giving up less than 100 points for each 300-point loss on the December 2022 contract. Thus, the new crop December should likewise dig in its heels and hold the line.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
