As we watched cotton prices fall to a recent low of 82.54, the question became how much lower and were wondering if the high is behind us. Well, I harken back to the words of my grandmother who often said, “Good things come to those who wait.”
Over the course of the past four weeks, prices have rebounded an astounding 26 cents. Last week alone, the market advanced 12.5 cents posting triple digit gains in four of the five trading sessions. This was capped by Friday’s limit up move closing the week at 108.59.
The ever-unpredictable USDA in its monthly WASDE report delivered a pleasant surprise significantly slashing both U.S. and global production. Consequently, traders took this to believe supply issues may far outweigh any decline in demand.
The 2022 U.S. crop is now projected to be only 12.5 million bales, three million bales lower than the July estimate. Though a reduction was viewed as likely the magnitude was most surprising as trade expectations had the crop at 14.75 million bales.
Higher abandonment in the Southwest now predicted to be 69 percent and a lower average yield of 846 pounds per acre constituted this decrease. In turn, ending stocks are to fall to an unheard of 1.8 million bales, only 12.6 percent of expected use. This would be the lowest stock to use ratio in almost 100 years since the 1924/25 marketing years.
Global production numbers were very similar with world ending stocks reduced by 1.5 million bales. On the ever-important demand side of the equation, world consumption is currently estimated to be 119 million bales. Though it’s three million bales lower than the May projection, it is all but unchanged from last year’s consumption numbers.
Following such bullish data, the market locked limit up in a matter of minutes, a sign of heavy spec buying. The most recent CFTC report for the week of August 2 through August 9 had managed funds increasing their net long position for the first time in seven weeks resulting in futures prices gaining over four cents.
Since then, prices have risen another nine and a half cents, most likely the result of further buying. Their current net long position of 3.3 million bales is some eight million bales below their peak of last October. Thus, this represents a great deal of buying power that cotton’s strong fundamentals may play to.
When combining all marketing years, weekly export sales were 119,400 bales while cancellations remained small at 22,400 bales. Net cancellations were even more impressive considering all but 4,400 were rolled into next year’s sales. Total sales for the 2022/23 marketing year now stands at 7.6 million bales, which if current production estimates are correct, is half the U.S. crop.
Though such bullish fundamental numbers are hard to top, last week did bring a bit of encouraging economic news. Inflation slowed from its forty-year high, as consumer prices rose 8.5 percent in July compared to a year earlier versus the 9.1 percent year over year in June. This was primarily due to declining energy prices.
It was not a broad-based cooling of prices, however, as other items such as groceries continued to rise now 13 percent higher than a year ago, the largest jump since 1979. The Fed will take this and other economic data into account when making interest rate hike decisions in late September. With inflation still well ahead of their target of two percent, look for them to remain hawkish.
Where to from here? Absent any adverse outside noise, the market is building momentum. Managed funds are being enticed to reverse course and once again become buyers. With the technical charts turning positive over the past several days, the next upside target is shown to be 114.25.
Generally, from this point forward in the growing season, crops do not get any larger. With supplies currently projected at historically low levels, be there a problem getting this crop out of the field, we could be sitting on a powder keg as for where prices could go. This coupled with an anticipated strong basis for quality should provide excellent selling opportunities for uncommitted cotton as we move into harvest season.