June 10, 2022

• Stock Market Action was the Opposite of Cotton
• Cotton Seems to be Immune to Demand Destruction Worries
• WASDE Held Few Surprises
• Drought Still Apparent in Soil Moisture Profile

Cotton futures spent most of the week chopping around in the lower half of the prior week’s range before making a strong breakout move to the upside on Thursday. Mostly thanks to an unexpectedly strong Export Sales Report (more below), July prices rallied sharply, finishing the week at 146.51 cents per pound, up 740 points for the week. December followed higher, but at a slower pace. The key new crop contract settled at 124.93 cents on Thursday, 483 points higher. Trading volumes were at two-month highs, but open interest was relatively unchanged. The total number of open contracts is still relatively small at 211,849, up just 1,049 since last week.

Outside Markets

Stock market action was basically the opposite of cotton in that equity indexes were trading in a two-sided fashion until Thursday when the bottom fell out. It is not easy to blame any particular piece of news for the sharp decline except perhaps that investors and traders were looking to let go of some risk ahead of Friday’s CPI figures. In Europe, the ECB finally announced plans to begin raising rates in July, which should have weakened the U.S. Dollar. Nevertheless, the U.S. Dollar Index finished the week with a significant rally toward last month’s highs. Treasury rates also moved toward their May highs as the bond market selloff appeared to resume. Significant concern about monetary tightening and renewed fears of recession seemed to be the undertone in the market at the end of the week.

Export Sales

Somehow, cotton seems to be immune to the demand destruction worries that are spreading. This week’s Export Sales Report surprised more than a few merchants who were expecting much lower sales as mills face tighter margins, especially in China, which was the largest buyer last week. For the week ending June 2, U.S. cotton shippers booked another 259,200 bales of old crop Upland export sales and 102,900 bales of new crop. China accounted for 114,500 bales of old crop and 66,100 of new, despite lockdowns and currently cheaper domestic cotton supplies. Vietnam, which is also a region that has reportedly slowed recently, accounted for the second highest total at 104,600 bales. Shipments were smaller thanks to the holiday, but still well above average for this week of the year. At this point, U.S. shippers have committed 111% of the USDA’s 2021/2022 export forecast, and traders are expecting a large number of sales to roll over to next season as logistics continue to strain shippers’ ability to fulfill sales.

WASDE

This month’s World Agricultural Supply and Demand Estimates (WASDE) held few surprises for the market. The 2021/2022 world balance sheet was marginally tighter as smaller crops in India and Brazil were partially offset by lower consumption in India (from lack of cost-effective supply) and China (from self-imposed Covid restrictions). The net effect reduced the 2022/2023 carry-in by 700,000 bales to 83.65 million, of which China holds 36.48 million. 2022/2023 crop production expectations rose 210,000 bales to 121.27 million, and use expectations fell 450,000 to 121.54 million. With the smaller carry-in, expected world ending stocks were tighter by 50,000 bales to 82.77 million. The U.S. balance sheet was unchanged for both the incoming and outgoing marketing year.

Weather and Crop Progress

 The moisture recently received was necessary and appreciated, however, the long-term stress of drought is still apparent in the soil moisture profile. This weekend and early next week will bring temperatures in the triple digits to much of Texas. Models also predict moderate risk for excessive heat stretching from East Texas to North Carolina. Echoing what has been said much of this year, above average temperatures are forecasted for much of the summer with little indication of moisture for Texas and Oklahoma. Isolated storms will continue to appear but drought conditions are likely to prevail throughout many of the cotton producing areas.

The Week Ahead

With the WASDE report behind us, large traders will be focused on finishing up their July positions. Index funds will have rolled out of July futures in the next few days, and merchants will be working on the last of their July on-call positions. With Southwest production still at risk, weather reports will be key. With demand still healthy, it is likely that next week’s Export Sales Report receives close scrutiny, too.

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 2:30 p.m. Central – Cotton-On-Call