By Jeff Thompson, Autauga Quality Cotton
Over the past few weeks, the market resembles a rusty old truck trying to climb a rainy dirt road. Each time it seems to gather traction, it slips and slides further down the hill. That is until last week when it posted its first positive performance in six weeks.
Friday’s close above 90 cents was admirable considering it was an eight-cent rebound from the previous week’s intraday low. This was due in large part to a shortage of economic news, a good week on Wall Street, and a decline in spec selling. Additionally, it was aided by trade short covering with mills seeing falling prices as an opportunity to fix a portion of their on-call sales.
Last week brought rain to many areas of the Midsouth and Southeast. Even so, overall crop conditions remain much the same with 38 percent rated good to excellent as compared to 60 percent in 2021. Worse yet, more than one-fourth of the crop is rated poor to very poor while only nine percent fell into this category last year.
Obviously, a crop of this condition will not match last year’s 17.5 million bales and is apt to fall short of the current USDA estimate of 15.5 million. The world’s largest cotton patch, West Texas, is on track to produce a smaller crop than the 3.5 million bales they did in 2011. If so, absent a barn buster crop back east, U.S. production should fall to around 14 million bales.
Such a deficit on top of already tight beginning stocks should provide some needed market support.
Last week’s export sales when combining all three marketing years were not extremely bullish but respectable at 211,100 bales with 18 different countries participating. Shipments of 336,100 bales were an improvement over the previous week but still off the pace to meet export estimates with only two weeks remaining in the marketing year.
However, there are some discrepancies between government agencies in the number of bales currently shipped that could make these numbers look better.
The potential for sales cancellations is worrisome each week. Once again, cancellations were minimal at only 31,800 bales. As a reference, during the market decline of 2011, weekly cancellations often topped 300,000 bales.
As mentioned, the market had very little economic data in which to react to last week. Most notable was a slight increase in jobless claims which could be the precursor to a recession. Sadly, China has enforced another round of Covid shutdowns.
Reports indicate 250 million Chinese are being barred from work, a number greater than the entire population of the United States. In this time, such actions cannot help but have a negative effect on their economy and that of others around the globe.
The Federal Reserve will meet later this week with an additional interest rate hike on their agenda. Most are expecting another 75-point rise in the rate, however there is a 25 percent chance could be more aggressive. No matter which they decide, the U.S. Dollar, currently at a twenty-year high, will further strengthen potentially hindering our export competitiveness.
Where to from here? Already trading a short crop, the market is desperately searching for a better indication of demand. Thus far, signs of a significant decline in consumption have been scant despite a struggling world economy that would foster such. It is likely to take weeks or even months for this to completely unfold.
In the meantime, we expect the market to trade in a wide range from a low in the mid-eighties to a high around a dollar. Bottom side support will come from additional trade short covering as mills see any dip in price as an opportunity to fix more on call sales.
Currently there are six million bales of on call sales-based December. Keep in mind, a growing volume of on call sales constitutes a great deal of buying power as was experienced last year.
On the top side, a return to a dollar will be met by a grower selling especially those who may have missed it the first time thus supplying resistance.