By Jeff Thompson, Autauga Quality Cotton
Desperately in need of a parachute, cotton prices fell for the sixth consecutive week. Plummeting through previous support, current crop December futures traded below 80 cents for the first time since July 2021. Despite Friday’s dead cat bounce of almost two hundred points, it failed to claw its way back and closed at 79.13.
Incredibly, in less than eight weeks, cotton prices have fallen thirty-seven cents. Though often subject to harvest pressure in the fall, a decline of this magnitude suggests there is more at play. Especially, given corn is up three percent and soybeans prices are unchanged over this same period.
Clearly, demand destruction has been the catalyst for this sell off. Our reliance on export markets is being sorely tested. The U.S. dollar now at a twenty-year high is fostering a debt crisis and scarcity of cash in many foreign countries. The exchange rate of currencies in twenty-one emerging markets are at all time lows making it very difficult to facilitate trade and open letters of credit.
As cash reserves dwindle, bankruptcies become a real threat setting the world economy on edge. With our Fed all but certain to increase interest rates look for the dollar to strengthen. Thus, foreign mills are operating at less than full capacity while yarn stocks accumulate.
A good example, last week’s U.S. export sales of only 89,000 bales declined fifty percent from the previous week. Shipments of 166,000 bales were thirty percent below the weekly average needed to meet our current export estimate of 12.5 million bales. The only positive was cancellations were minimal at 3,200 bales.
World mill use is currently estimated at 115.8 million bales compared to the previous marketing year when 122 million bales were consumed. Industry consensus has actual world consumption for 2022/23 nearer 110 million bales. Such perception has led specs to decrease their net long position to two million bales, its lowest level since July 2020.
Where to from here? The low seventies are the new downside target. Support at this level is strengthened for two reasons. First, new crop futures will serve to shore up prices. In the past eight weeks, the spread between current crop futures (Dec 22) and new crop futures (Dec 23) has shrunk from twenty-seven cents to only five.
Considering the high cost of production, new crop prices can ill afford to fall much further without risking planted acres thus look for this spread to flatten. In addition, we are only a few cents shy from a loan deficiency payment being triggered on the 2022 crop. When current crop futures approach seventy cents an LDP is likely initiated thus serving as a free Put option.
For prices to move higher we need the Fed to halt or curb interest rate hikes, a weakening dollar, the world economy to stabilize, and for the Philadelphia Phillies to get knocked out of the baseball playoffs. Why the latter? Over the past one hundred years, every major economic downturn has occurred in a year in which the Phillies won the World Series; 1929, 1930, 1980, and 2008. Currently, they are one game away from advancing to the Series. So go Padres! If not San Diego, go Astros!
