By Jeff Thompson, Autauga Quality Cotton
As May futures becomes history, the market is reacting as it did when the previous two cover months expired giving us a scare by selling off significantly from contract highs before the new cover month rebounded vigorously. Last week, July advanced to a new contract high that included two limit up days of 500 and 700 points. Despite some month end profit taking on Friday, it closed the week at a respectable 145.63.
To our good fortune, December futures were drug along hitting a new intraday high of 126.10 before succumbing to the same month end profit taking but gaining almost two and half cents on the week to settle at 122.07.
At the risk of sounding like a broken record, these rallies were due in large part to trade short covering. On call sales now amount to 6.5 million bales. As a comparison, the average for the past eleven seasons at this date is 2.8 million bales.
The next closest was 5.1 million bales in 2018 which resulted in the market advancing twelve cents from mid-April to June expiration. Better yet, this underlying support has kept specs comfortable in their sizeable net long position.
Rumors out of India also fueled last week’s advance. If you recall, they recently lifted the 10 percent duty on cotton imports through September. It is now being heard they will ban exports of Indian cotton for the coming year as their domestic supplies are tighter than once thought.
In recent years, India has been the world’s third largest exporter of cotton. If they now become a net importer, it’s going to further open the export door for U.S. cotton.
In a few weeks, once on call sales support is gone, the market will shift its focus to supply and demand. At present, the supply side looks to be shrinking, especially considering the Southwest is still awaiting May planting rains while long range forecasts are not favorable. The U.S., alone, could easily see losses of two to three million bales.
That being said, the direction this market takes going forward will be greatly influenced by demand. Though we have seen little in the way of decline, one must think with global economic conditions worsening, world consumption of 124 million bales is very unlikely.
The U.S. economy shrank in the first quarter of 2022 as our GDP slipped to adjusted annual rate of 1.4 percent compared to 6.9 percent in the fourth quarter of last year. On a positive note, consumer spending, which accounts for 70 percent of the GDP, grew this past quarter by 2.7 percent. This follows a rise of 2.5 percent last year.
It is hoped positives such as low unemployment, increased industrial production to satisfy demand, and wages at all-time highs will mask the negatives, such as inflation and rising interest rates, in the consumer eyes and their spending go unaltered. In addition, let’s hope the Fed can guide our economy to a soft landing rather than a debilitating recession.
Where to from here? We should see much of the same in the next four to six weeks with new contract highs possible as mill fixations supply support and entice spec buying. Beyond that, this long in the tooth bull market will be watching crop conditions and demand. Of course, as always, it is what we do not foresee we should be most worried about.