June 17, 2022

• Inflation Did Not Peak as Hoped
• Record Sales to China This Week
• Hot Temperatures and Little Rain Expected
• Market Closed Monday for Juneteenth

As merchants and speculators are quickly exiting the July contract, December is becoming the focal point. While July futures traded a relatively narrow range from 142.50 cents per pound to 147.50 cents this week, December futures slid from 126.00 to 117.30. So, July’s range was 500 points wide and December’s was 870! July finished the week at 143.53, down 298 points, while December finished at 119.23, down 570. July settled at a premium of 24.30 cents to December. Trading volumes were relatively heavy. Open interest moved sharply lower (as it normally does following July option expiration), shedding 12,618 contracts to hit just 199,231 open futures, which is the lowest in 22 months. 

Outside Markets

Macroeconomic negativity was a major headwind for cotton this week. Last Friday, May’s Consumer Price Index readings were surprisingly high, clarifying that inflation had not peaked as many had hoped. On the same day, consumer sentiment data plummeted. Tuesday’s Producer Price Index data was more in line with expectations, but Wednesday’s retail sales disappointed the market. Market expectations that the Federal Reserve would increase interest rates 0.75 points rather than the previously expected 0.50 were priced in Monday, and when Wednesday’s meeting happened the Federal Open Market Committee did not disappoint. The Federal Funds Rate was lifted all 75 points and the language of the public announcement toughened, providing the market a clearer signal that stopping inflation on Main St. would be taking priority over stopping losses on Wall St. Accordingly, stocks have had a very tough week with major indices having slid firmly into bear market territory (more than 20% losses from their peaks). The USD hit a 20 year high as interest rates surged before giving back some gains on Thursday. 

Export Sales

If it were not for record sales to China for the current week, today’s Export Sales Report would have seemed rather slow. With China, next marketing year sales were the highest ever for this week of the year. In addition to another 7,300 bales for the outgoing marketing year, China ordered some 363,700 bales for the 2022/2023 season. While 10 other countries were also buyers, the sum of their combined old and new crop sales were just 35,700 bales. In other words, there was little breadth to last week’s demand, which is not typically a good sign of robustness. China will have to continue appearing on the report for large quantities to keep up high aggregate demand level, and only the buyer and the shipper registering these large orders can tell if that will continue. 

Weather and Crop Progress

Most of the Southwest cotton territory, from Kansas to the Rio Grande Valley, has been dominated by heat, dryness, and wind for the past week. Southwest winds have driven high evaporation rates that have taken back much of the moisture received in the past month. Unfortunately, the seasonal outlooks are still calling for hotter than average temperatures and lower than average precipitation in the Southwest, especially over the next two weeks. It would take a rather sharp deviation from the current forecast to have a meaningful improvement of the outlook. While nearly all the cotton is now planted, it seems likely that crop conditions will continue to slide as they did on Monday’s Crop Condition and Progress report unless and until this crop gets more rain.

The Week Ahead

The July contract is one week from First Notice Day and merchants with any mills left on-call will be scrambling to square their positions by the end of Thursday. Otherwise, the market has little more than the usual weekly report and weather forecasts to worry about next week. The next major piece of fundamental news will be the Acreage Report at the end of the month. The market will be closed Monday in observation of Juneteenth.

In the Week Ahead:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Tuesday 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