Thompson on Cotton: High Grain Prices Causes Acreage Shifts

Cotton planter in residue. Photo: Alabama Cooperative Extension

In recent weeks, the battle between grain and cotton prices resembles that of the race between the tortoise and the hare. Corn and soybeans traveling at warp speed have left cotton in their dust. Such was the case last week with a slow start and December futures rallying late to close at 86.89 for a weekly gain of almost two cents. This is an increase of nearly 15 percent over the past three months for cotton.

This is quite impressive until you look at corn and soybeans which are up 41 and 25 percent, respectively, over the same period. We must keep in mind, however, the moral of the story where the underdog tortoise ultimately prevails in the end.

Last week, we saw the cotton market pulled in opposite directions as varying events and noteworthy news unfolded, hence the lackluster trading. On a positive note, cotton prices have gotten drug along as if caught in the draft of the resurgent grains.

This disparity has also led to cotton acres being lost to corn in the past few weeks while it stands to lose additional acres to soybeans in the coming weeks. It will be interesting to see if the USDA bullishly accounts for this in its May WASDE report scheduled to release on Wednesday.

Possibly applying some price pressure was the occurrence of much needed rainfall in the Southwest. The Rolling Plains saw over six inches which could not have come at a more perfect time for planting.

However, the High Plains were not as fortunate receiving only a half to an inch in scattered showers and not enough to turn things around. Also, it was reported Lake Altus in Oklahoma, a reservoir used for irrigation, was only at 28 percent capacity. The outlook for these areas is still very much in question.

As for negatives, the most looming is a continued rise of new Covid cases globally. It has become so severe that another round of economic shutdowns is imminent in these hardest hit areas. Once again, India set new infection records of over 400,000 per day twice last week.

At present, Latin America, Asian Rim countries, and Africa now account for 78 percent of the new daily Covid cases and 72 percent of the deaths worldwide. What makes this such a threat to cotton consumption is it is taking place at the hub of global textile operations.

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Here at home, our economic recovery efforts were dealt a serious blow on Friday. Economists had predicted that one million jobs would be created in April only to find it to be a paltry 268,000. Unemployment, rather than falling for another month, rose almost a half a percentage point to 6.5 percent. All this in the face of unemployment claims falling to its lowest level since the pandemic began.

This reduction in the number of people in the workforce is causing inflated prices, slower business activity, and supply chain disruptions, all of which are suppressing what would otherwise be rapid economic expansion. Although, this is not surprising given the government is disincentivizing people to work by extending additional unemployment payments until September.

The only bright spot in this for cotton is it devalued the Dollar.

What lies ahead? Look for last week’s market activity to be the norm as these influences play out. Take comfort for there remains firm support provided by the grains and the unknowns surrounding this crop. The aforementioned negatives will likely be temporary after which economic recovery efforts will regain traction.

So, we remain cautiously bullish as do the Managed funds who continue to add to their new crop long position with a total of 1,678 contracts this week. All eyes will be on the USDA monthly report to be released at 12:00 p.m. EST on Wednesday. If a further decline in ending stocks is shown by either lowering planted acres or raising exports, it will provide some much-needed price momentum.

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