December 30, 2021

• Post-Christmas “Santa Claus” Rally in Outside Markets
• 2021 Held Major Market-Moving Events
• New Year Brings Positive Long-Term Outlook for Cotton

Futures Market Activity

March futures continued the rally that began last Tuesday, helped by a nice post-Christmas “Santa Claus” rally in outside markets. Monday’s low of 108.51 cents per pound was the low of the week for March futures. Thursday’s high at 115.33 cents was both the high for the week and the highest price since before Thanksgiving. The lead contract settled at 114.34 Thursday, up 522 points for the week. Cotton futures are up 36.37 cents versus December 30 of last year, when the March 2021 contract settled at 77.97. Despite the week’s large range and high volatility, daily trading volumes were still low because many market participants are still enjoying the holidays and away from their monitors. Open interest gained 5,341 contracts to hit 237,609.

A Brief Review

Looking back on 2021, there was no shortage of major market-moving events. Stocks are finishing the year out with many indices making or near all-time-highs. The S&P 500 is up close to 28% year-to-date and so is the Bloomberg Commodity Index. Cotton had a particularly fantastic year in 2021, up over 45%. These large moves in the markets have been driven by combinations of the reopening trade in the spring, large spending bills (the American Rescue Plan in March and the Infrastructure Bill in November), continuing logistical bottlenecks and supply shortages, and an increasingly strong jobs market. In fact, the jobs market is so good that this week’s continuing claims number fell to pre-pandemic levels and is only 67,000 above the 48-year low from 2019. So, despite the threat of omicron, markets are ending the year with a great deal of optimism about the future.

Cotton itself has had quite a wild ride this year, touching 10-year highs. From a fundamental point of view, cotton’s outlook has only grown tighter. Over the last twelve months, the USDA has revised up the current and past two marketing years’ consumption estimates by a combined total of 8.4 million bales, while production estimates have been fairly flat. In fact, if the current consumption forecast of 124.4 million bales holds, demand will have marked a new record. U.S. retail sales of clothing and apparel have surged over the past several months as consumers have been aided by stimulus funds and have spent more on goods and less on services. In terms of dollars spent, end-user demand for cotton in the U.S. has just had its best year ever.

The Year Ahead

Cotton production, particularly in the U.S., made a resilient comeback this year, and it looks as though we may have strong production in Brazil and Australia as well. Overall, the higher production is necessary to feed the world’s growing demand. World production has been stagnant for several years even as consumption has trended higher. Looking ahead, production continues to be a major concern for several reasons. First, inflation is not strong enough of a word to describe how the cost of production has risen this year. This impact of such prices for fertilizer, fuel, chemicals, and labor is still undetermined, but it would be counter-intuitive to expect higher yields when many producers across the globe are trying to spend less on inputs. Secondly, Texas’ weather was exceptionally good (and lucky) for cotton production this year, and the early outlooks for 2022 are not encouraging. Texas production provides a lot of the variation in U.S. production and whether or not the world’s largest cotton exporter will have a surplus next year is still terribly uncertain.

On the demand side of the equation, there are still several unknowns as well. While economic recovery looks strong, 2022 has several looming challenges and unknowns. For instance, it is not clear whether the U.S. consumer will continue to spend as liberally without stimulus funds. There is some wiggle room here as retailers’ inventories are low, but whether America back-at-work spends as much as America with stimulus funds is not clear. Perhaps the greatest challenge belongs to the Federal Reserve, which will have to tackle the highest inflation in decades without overshooting. Lastly, China still has an economic slowdown on its hands, triggered by the popping of a property bubble and near collapse of some large development companies. China’s domestic consumption of cotton is now on par with Europe and the U.S., so retail spending in China will be watched more closely than it used to.

While traders continue to monitor the risks above, the backdrop is a positive long-term outlook for cotton. Risks abound, but the future looks bright.

We wish all our readers a Happy and Prosperous 2022!

In the Week Ahead:

• Monday at 2:30 p.m. Central – Delayed Commitments of Traders Report
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call