July 08, 2022

• Attention on Federal Reserve Over Next Few Quarters
• Price Drop Revamps Mill Interest in U.S. Cotton
• Crop Conditions Decline Slightly This Week 

Futures prices plummeted to a fresh low of 88.10 cents per pound this week. Traders seemed to make up for a shorter week by stuffing more selling into Tuesday and Wednesday’s action. Prices seemed to find their legs on Thursday as the outside markets had some relief. December futures settled at 91.88 cents, down 696 points for the week. Trading volumes were heavy, especially as the market found a new low on Wednesday, but open interest declined just 2,348 contracts to 173,261. Although the absolute level of open contracts is a fresh post pandemic low, the rate of decline has slowed to the point that it appears new buyers are stepping in sufficiently to offset the liquidating longs. 

Outside Markets

Recession fears and bets on how sharply the Federal Reserve will continue to tighten over the next few quarters are still the driving forces in all markets. Perceived policy instability is driving large institutional investors and hedge funds to make large adjustments to their positions, sharply rotating exposures from cash to bonds to stocks to commodities, etc. Stocks had a decently healthy performance this week, recouping last week’s losses. Bonds rallied then fell sharply with the release of the Fed’s latest meeting minutes, which revealed a very hawkish tone. The U.S. Dollar made fresh 20-year highs, which punished commodities fairly severely. The Bloomberg Commodity Index recovered some on Thursday, but not before falling back to the levels it was trading before Russia’s invasion of Ukraine. Among the commodities caught in the crossfire, cotton was actually in the middle of the pack. The sharpest loss over the last five sessions was Soybean oil, down 11%. 

Export Sales

It looks like last week’s large price drop was enough to get mills interested in U.S. cotton again. In addition to 37,400 bales of net new Upland sales for the end of the 2021-2022 marketing year (ending July 31st), merchants booked 381,900 bales for delivery in 2022-2023, and another 179,200 for delivery in 2023-2024. Sales were well-distributed, but large buyers for next marketing year included Pakistan (98,700 bales), Turkey (95,500), Bangladesh (66,100), and Vietnam (47,900). Shipments are also finishing the year at a healthy pace with Upland and Pima combined shipments at 388,300 bales. The combination of strong sales and shipments confirms that mill demand remains robust, even as broader market activity shows major concerns about downstream demand and fears of a recession.

Weather and Crop Condition 

Monday’s Crop Progress and Condition Report showed a slight decline in the share of U.S. cotton rated “Good” or “Excellent”, bringing the percentage to just 36% of the crop. The share of fields with a healthy rating remains the second-worst on record, only behind 2011. Unfortunately, it is already too late for much of the Southwest crop, and we may see numbers improve as the share of fields that are no longer regarded for the survey increases. Looking forward, the Eastern half of the Cotton Belt should receive relieving rains in the next few weeks. West Texas has some modestly better chances to receive more pop-up storms, but the high-pressure ridge that has allowed a handful of small storms to sneak into the region is likely to move over the middle of the country soon, which will keep temperatures blazing.

The Week Ahead

The USDA will release the July WASDE report next Tuesday the 12 at 11 a.m. Central Time, and there really isn’t anything that matters more from a purely cotton-fundamental point of view. Outside markets are still in control and will receive more than their fair share of attention. Otherwise, the Crop Condition and Export Sales reports will be focal points for supply and demand considerations. 

In the Week Ahead:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Tuesday at 11:oo a.m. Central – WASDE
• 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