May 6, 2022

• Investors Focus on the Federal Reserve
• Shipments were Strong this Week
• Scattered Rain and Thunderstorms Recorded Over Texas, Oklahoma, and Kansas

July futures surged higher this week, making consecutive life-of-contract highs from last Friday through Wednesday, topping out at 155.95 cents per pound. Unfortunately, much of the gain was given back on Thursday as outside markets melted down. July cotton moved limit down on Thursday trading to finish the week at 148.76 cents, up 108 points for the week. Despite the fresh highs, trading volumes were not particularly heavy. In line with the relatively low volume, open interest did not change sharply. Traders added 3,290 contracts to finish the week at 207,335, which is still very low for the past year.

Outside Markets

It was a wild week for the stock market, with investors largely focused on the Federal Reserve’s rate decision. While many in the market had been expecting the Federal Open Market Committee to raise the Federal Funds rate as much as 75 basis points, the actual increase was 50 basis points with an outlook for continuing increases over the rest of the year. The Fed has also effectively decided to reduce its balance sheet by limiting reinvestment of proceeds from its investments in treasuries and mortgage-backed securities. The decisions seemed relatively dovish to markets on Wednesday causing stocks to surge higher, but the bearishness of continuing rate hikes seemed to take hold on Thursday giving back all the prior days’ gains. The USD Index also surged past 2020 and 2017 highs to the highest it has been in 20 years. While a strong U.S. Dollar is certainly a headwind for commodities, grains and energies largely ignored it. Cotton, on the other hand, was the worst performer in the entire commodity space during Thursday’s trading.

Export Sales

Demand continues to impress. Despite rumors of cancellations from China, the Export Sales Report for the week ending April 28 showed net new sales of 232,400 bales including China’s contribution of 99,700 bales, which is more than enough demand for the whole market, let alone for a single destination. Other large buyers included Vietnam (65,800), Bangladesh (24,000), Turkey (15,400) and India (14,900). Shipments were also very strong with 426,600 Upland and 21,200 Pima bales leaving the country. The strong shipments may have rekindled some faith that the USDA’s current export target is not too high. On top of it all, mills also booked 93,200 bales for next marketing year, showing healthy demand may outlast the current crop.

Weather and Crop

Scattered rain and severe storms were recorded over parts of Texas, Oklahoma and Kansas throughout this past week. Although the rain was needed, soils quickly absorbed the little moisture received. Drier-than-usual weather is predicted for May and June, which will keep soil moisture levels low in drought-ridden areas. Summer-like conditions are expected for much of the Cotton Belt next week, with many areas in Texas predicted to have temperatures in the triple digits and upper nineties. It isn’t good drought-busting weather. Rain will desperately be needed in the coming weeks if we want to see planting progress as usual.

The Week Ahead

Traders’ minds have already begun to ponder what the USDA will say in the next WASDE report, which is a very significant one. The May report not only updates the 2021/2022 balance sheet, but will give the USDA’s first full forecast for the 2022/2023 season. The report will set the tone for the next few months until a better view of likely production emerges.

In the Week Ahead:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Monday at 3:00 p.m. Central – Crop Progress and Condition
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 11:00 a.m. Central – WASDE
• Thursday at 2:30 p.m. Central – Cotton-On-Call