But what is normal? As I write this, old crop cotton futures on the ICE are trading between $1.20 and $1.25 per pound, while new crop Dec ’22 is almost $1.05. The level of prices is historically high and rare. That is to say, it isn’t normal. Cotton may be fairly priced given the balance of recovering demand and constrained supply, but I doubt that dollar cotton is the new normal.
Let’s look at various parts of this overall picture. The recovery in cotton demand is normal. That is to say, world consumption has returned to its typical uptrend of 1.5% to 2% increase per year.
While I’m on that subject, let me say that the current supply chain disruption is decidedly abnormal. The lack of truck drivers, containers, and space on ocean ships is something that happens mainly during wars, pandemics, and other economic upheavals. My expectation of the current supply chain disruption is that market incentives will lead to its correction sometime in 2022. That is assuming there are no new disruptions of a medical, military, or monetary nature.
The current drought conditions in the Southern Plains region are, unfortunately, fairly normal. If NOAA’s forecast is correct, the La Niña drought may transition into a normal hot Texas summer. The implications might be a crop under 18 million bales, which would keep supplies tight and prices high. The perceived short-crop situation could also encourage merchant buyers to buy and sell more inventory earlier in the year, with more of that contracting on an on-call basis. Similarly, the general expectation of a short crop situation could induce more speculative buying. The combination of speculative buying and mill fixation buying (a feature of on-call transactions) could support new crop prices in the same way that old crop prices were pushed over a dollar in 2021.
Lastly, there is always a downside risk to consider. It is not normal for spreading droughts in the spring to get turned around by above-average rains in June and July. But it could happen, as it did in 2021. And if it happens on 13 or 14 million acres of U.S. cotton plantings, then the picture could get ugly.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.
