February 11, 2022

• Consumer Price Index Hits Four-Decade High
• WASDE World Ending Stocks Fall to 84.305 Million Bales
• Export Sales Slowed Down This Week
• Drought Levels Remain for Near Future

March futures settled at 125.66, down 196 points for the week ending Thursday. Trading volumes were high through the combination of commodity Index funds rolling forward long positions, mills fixing their on-call purchases, and position adjustments ahead of the Friday option expiry. Open interest hit its highest level since November 2017 by adding 5,491 contracts to reach 267,089.

Outside Markets

Stocks returned to last week’s high on Wednesday after a rally in tech stocks. The Consumer Price Index accelerated to 7.5%, which is a four-decade high and above the 7.3% expectation. Initial jobless claims were reported lower than expected at 223,000. The ten-year treasury yields jumped to 2.05%, which is the first time it reached the 2% benchmark since August 2019. The weakness of the U.S. Dollar has been supportive for crude and soybean, with both trading at higher prices than the previous week.

February WASDE Update

On Wednesday, the USDA released the February revisions of the World Agricultural Supply and Demand Estimates (WASDE). The report was generally bullish for grains, but more mixed for cotton, at least at first glance. Cuts to the production estimates in India (lowered 500,000 bales to 27.0 million) and Tanzania (lowered 345,000 to 255,000) offset minor gains elsewhere. The world use estimate was 186,000 bales higher, mainly from an increase in Iran. Net of these and other historical data revisions, the forecast for world ending stocks fell 701,000 bales to 84.305 million bales.

On the other hand, the U.S. ending stock forecast rose 300,000 bales as the USDA cut this marketing year’s exports 250,000 and made a rounding adjustment to U.S. ending stocks. Higher U.S. ending stocks are often a bearish sign for the market, but the USDA did at least note that U.S. shipments are lagging because of “logistical issues” rather than a lack of demand (of which there is plenty). The USDA has, in fact, used this same argument for cutting its export estimate in the past in February of 2018, when it shaved 300,000 bales off the export estimate to forecast 14.5 million U.S. exports. Unfortunately for the USDA’s record, shipments that year rallied to eventually hit 16.28 million bales. Whether shipments rally from here or not it is highly likely that all the U.S. crop will be committed before August 1, and how much cotton exists in the country on that day (i.e., U.S. ending stocks) is unlikely to be as clear a price signal as in other years.

Export Sales

Export sales slowed down compared to the high numbers seen the week before. The week ending February 3 saw new sales of 185,200 Upland bales for the 21/22 marketing year and 96,100 bales for the next marketing year. Shipments are still moving towards the seasonal pace but were slightly reduced with 299,700 Upland bales being shipped. The biggest buyers on this report were China (100,800 Upland bales), Pakistan (20,600), Vietnam (14,000), Mexico (12,300), and Turkey (12,200). Pima sales were above the four-week average with 5,300 bales being sold for the current marketing year. Shipments of Pima saw a marketing year high with 20,900 bales getting exported.

Weather and New Crop Outlook

Temperatures rose this week, bringing clear skies throughout the Southwest. A large portion of West Texas still ranges from “abnormally dry” to “severe drought” according to the U.S. Drought Monitor Map. A cold front will move through over the weekend but temperatures should once again rise next week. Although the long-term outlook would benefit from getting some moisture, it looks like the drought levels we’re seeing now will be present for a while.

The Week Ahead

Merchants full focus will turn to cleaning out the last of their March on-call sales. With the WASDE, March option expiry, and Index rolling passed, traders will be focusing on how the March contract winds down, especially relative to the May contract. Otherwise, the weekly Export Sales Report will retain its key significance in the week ahead.   

In the Week Ahead:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call