September 2, 2022

• No Change in the Fed’s “Tight Money” Policy
• USDA Export Sales Report to Return September 15
• Past Week’s Rains Relieved the Drought Intensity

It was a tough week for most commodity futures, and cotton was no exception. After settling at the highest level in months last Friday (117.68 cents per pound), December futures paused on Monday. Tuesday saw heavy selling pressure, with prices moving nearly limit down. Just as prices had been relatively stable on Monday, the market seemed to pause again on Wednesday. Sadly, there was no bounce on Thursday and prices followed broader markets lower. December, March and May futures finished Thursday at limit down. December settled at 108.21 cents, marking a loss of 590 points for the week. Trading volumes were relatively high versus last week, and overall open interest gained 4,433 contracts to hit 212,337 as market participation continues to increase.

Outside Markets

Overly optimistic bets that the Federal Reserve would pivot from its tight money policy at the first signs of inflation peaking were instantly destroyed by Federal Reserve Chairman Powell’s short and straightforward speech at the Jackson Hole Economic Symposium last Friday. Although some price data showed a slight moderation in inflation (and even a slight month-over-month decline by one measure), Powell assured the world that the Federal Reserve will not be deterred from taming inflation “until the job is done.” There could not have been a stronger signal that the Fed will continue to raise interest rates and pursue a program of “quantitative tightening” in which it will cease to reinvest money collected by assets on its balance sheet and will even begin to pull dollars out of circulation by selling its assets. With clarity on the Fed’s hawkish stance, investors began selling stocks and betting on an economic slowdown. Energy price spikes in Europe and new lockdowns in China only stoked the bearish action in markets, sending the USD index to its highest level in 20 years. Recession bets and an expensive U.S. Dollar are not good for commodities generally, and cotton was one of the casualties.

Export Sales

The USDA has announced a return to the legacy export sales reporting system until all of the bugs can be worked out of the new software. The difficulties with data entry and release mean that the market will have to wait until September 15 for updated data, but at that time we should receive three reports on the last four weeks of export sales. Unfortunately, even the WASDE team will have to “fly blind” for the September 12 WASDE. 

Crop Progress and Weather

While much of the Southwest remains in drought, the past week’s rains relieved the drought intensity by as much as two classes in parts of Texas. Not only did we see above average temperatures in August, but we also saw above average rainfall in many areas throughout the state. High temperatures have backed off in recent weeks, and most of the heat stress is in the Western U.S. for now. The coming week will bring more precipitation throughout most of the Cotton Belt, driving some fear of further quality degradation where the cotton is open and has already received heavy rains. Tropical storms will continue to be a wild card in the month of September and could bring excessive rainfall if they appear.

The Week Ahead

Following this week’s heavy macro data load, next week’s planned data releases are relatively light. Traders will keep a little more focus on global production, perhaps getting further assessment of the disastrous flooding in Pakistan. Tropical weather will also be a key watchpoint. Lastly, with the Exports Sales Report sidelined, traders will likely pay a little more attention to the Cotton On-Call Report.

• Friday at 2:30 p.m. Central – Commitments of Traders
• Monday at 3:00 p.m. Central – Crop Progress and Condition
• Thursday at 2:30 p.m. Central – Cotton On-Call