By Jeff Thompson, Autauga Quality Cotton
Despite one of the most unpredictable weeks in stock market history, mixed signals from economic data, planned interest rate hikes, subsequent rise of the dollar, and Covid’s continued stranglehold on supply chains, cotton prices hit new contract highs. A week of consolidation and sideways trading abruptly changed course Friday as triple digit gains were captured on above average volume.
The more volatile March futures closed at 123.76 after hitting a high of 125.60 while the more modest trading of December futures touched a dollar before retracing to settle at 99.73. This was the eighth consecutive week of positive gains. Though underlying strength is very supportive, prices at such lofty levels are vulnerable to the above-mentioned factors.
If nothing else, a correction of some sort is overdue considering cotton prices are up 16 cents in the past eight weeks and an astounding 75 cents higher from when the rally began less than two years ago.
It was reported this week that the U.S. economy grew last quarter to an annualized rate of 6.9 percent, the strongest yearly growth in four decades. Keep in mind that consumer spending constitutes two-thirds of the economy.
Robust spending by households and companies rebuilding depleted inventories in the face of supply shortages fueled this growth. As shelves become stocked, borrowing costs rise and inflated prices tighten consumer budgets, this pace will be difficult to maintain. Even so, the biggest challenge to the economy will not be demand but rather supply with 3.6 million workers absent from the workforce since February 2020.
That said, the demand for U.S. cotton remains strong as higher prices in China and India increase our competitiveness in the world marketplace. Last week’s combined current and new crop export sales were an outstanding 500,000 bales, up 21 percent from the previous week and 58 percent above the four-week average.
No doubt this incited Friday’s price rally as the spec community took note. Also, shipments exceeded 200,000 bales for yet another week. Though disappointing, it wasn’t a step backward and maybe a slight sign that supply chain bottlenecks are loosening. Sales cancellations, though minimal to this point, remain a concern if shipping woes continue.
A temporary decline in the above numbers could be seen as China begins its Lunar New Year celebration on February 1 and the Olympic games begin.
Where to from here? Surprisingly, the cotton market has broken from the stock market it so often mirrors. Since the beginning of the year, cotton is up 10 percent while the S & P 500 is down seven percent. This speaks not only of money managers seeking commodities as a haven for cash in times of inflation, but, fundamentally, cotton is benefiting from the ongoing tug of war between the trade and managed funds.
The trade must buy futures against current crop (March, May, and July) on call sales of over 12 million bales as they did so on a small-scale last week. With most of the current crop already priced by growers, little in the way of trade selling remains. Thus, aware of this, the managed funds have no reason to exit their sizeable long position of currently 7.6 million bales.
Therefore, absent any black swan event letting mills off the hook, this disparity should provide market support for the next several weeks. We’ve included a May futures chart since most merchants are using this month to bid on recaps.
Though the movement of March and May look very similar, an inverted market has May trading some three cents lower.
