By Jeff Thompson, Autauga Quality Cotton

Over the past few weeks, managed funds and specs have slowly taken profits by liquidating their long position from a high of nearly ten million bales to now seven million. As a result, cotton prices have fallen over ten cents. Despite these actions, new crop prices have managed to hold above a dollar while awaiting any kind of positive news that would entice specs to reverse course igniting another rally.

Last Friday, we may have caught our first glimpse of this as May futures gained over 400 points to finish the week at 121.03, only two and half cents off the contract high close. Similarly, December futures jumped nearly three hundred points on the day to settle at 104.24, only a penny off its contract high close.

The week began with a WASDE report which, at first glance, appeared bullish with world ending stocks reduced by 1.7 million bales to 82.57 million bales. However, this had nothing to do with current crop, but rather a lowering of production numbers from years past. Thus, the market showed little reaction to the numbers.

Weekly export sales were excellent with combined current and new crop sales exceeding 400,000 bales for yet another week with China responsible for almost half these purchases. Shipments continue to show improvement at 343,760 bales which now leaves us needing to average 398,600 bales a week to meet export estimates.

As with the WASDE report, the market barely batted an eye. Then came Friday’s announcement by China that import quotas would be expanded by 1.7 million bales for all non-state-owned enterprises in addition to their WTO obligation of 1.7 million bales.

Friday’s rally was most likely the result of fund and spec buying in expectation of greater Chinese imports. Next week’s Commitment of Traders report will confirm.

News on the economic front was not surprising as the Consumer Price Index indicated we are paying 7.9 percent more for goods and services than we did a year ago. This is the highest in forty years since it exceeded eight percent in 1982. Fuel accounted for a third of this rise as prices at the pump jumped 67 cents just last week. Nonetheless, increases were seen across all sectors of the economy.

It’s important to note every hike in fuel prices over the past 60 years has brought an end to economic expansion and was quickly followed by a recession. With the Federal Reserve set to raise interest rates at this week’s meeting, their aggressiveness to do so could easily push us into a recession especially with the War in Ukraine complicating matters.

Where to from here? As the market shifts its focus from supply to demand, pressure on prices will come to bare. The inflationary environment we are now in will work to erode demand. There are already some debates within the trade as to world consumption. Though USDA has it at a record 124 million bales, Cotlook projects it to be quite lower at 119 million bales.

How the specs and Funds read the tea leaves will greatly influence the direction the market takes. Fortunately, the inflation hedge commodities provide such individuals should temper any desire to take their money and run.

Also, many questions surround the 2022 crop. The entire Cotton Belt is looking at long range forecasts calling for below average rainfall. Planted acres are even more at risk as grain prices continue to out advance cotton. Even though fertilizer prices have more than doubled, seven-dollar corn can buy a lot of fertilizer. Also at today’s prices, double cropping wheat and soybeans looks to be a home run.

That being said, new crop prices may still have some life in the days leading up to planting. Hopefully, this week will bring some follow-through trading from Friday’s action. If so, as the December contract moves closer to its high, take advantage of the opportunity.

Considering history and the outside forces at work, upside potential will become limited. It’s not beyond reason new crop prices could hit their high between now and planting.