As cotton attempts stay in step with the grains, we must take the good with the bad. Last week it was the latter, as traders took to profit taking steered by inflation worries, improved planting conditions, and Covid concerns. After five consecutive weeks of gains, cotton posted a loss with December shedding over five and half cents to settle at 81.22.
Most of this decline occurred late week in high volume trading indicative of sell stops being triggered. This rush to the exit by the Funds snowballed causing prices to fall below the uptrend lines.
Understandably, these markets were overbought considering their rapid rise, but the severity of the selloff was unexpected. We contend the reasons behind their move are temporary and such overreaction will give way to strong fundamentals over time.
I am sure by now everyone has digested the May USDA numbers. Favorable as they were, the market showed little reaction since they were in line with industry projections. Domestically, production was raised 2.4 million bales and exports lowered 1.5 million bales versus last year.
However, we call into question the basis used for these calculations. Case in point, the U.S. crop estimate of 17 million bales is based on March’s intended planting projections of 12 million acres. With escalating grain prices stealing acres from cotton, actual plantings will be significantly less.
In addition, lower exports seem very unlikely given economies are reopening to consumers laden with cash and lower debt along with a pent-up desire to spend. Even if the USDA is correct, ending stocks will have fallen to 3.1 million bales resulting in the lowest supply of cotton in six years.
Globally, the gap between production and mill use widen slightly while ending stocks remained rather unchanged posing little threat to the market.
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There was hope a surge in weekly export sales would serve to lend additional support thus spurring the market forward. Unfortunately, for yet another week, current crop sales were weak at a little over 58,000 bales while new crop sales were only 72,000 bales.
Nevertheless, new crop sales were the largest in seven weeks. Shipments remained strong at almost 300,000 bales easily on pace to meet the revised export estimate of 16.25 million bales.
The biggest news last week was on the economic front where the consumer price index, a leading inflation indicator, rose 4.2 percent from a year earlier, the highest 12-month level since 2008. Not surprising given the pandemic decline, supply chain bottlenecks, and pent-up consumer demand.
The Fed is betting this is temporary and will slow once the labor shortage is corrected and stimulus spending subsides. If not, they will be forced to tighten monetary policy and raise interest rates which could curtail spending. We were told Friday that U.S. retail sales were unchanged in April as the boost from stimulus money faded following the 10.7 percent surge in March.
Nonetheless, look for sales to accelerate in the coming months amid record savings and a reopening of the economy. But just how long this burst of spending lasts will be greatly affected by future Fed actions.
What lies ahead? With many locations in the Southwest still under drought conditions and other regions of the U.S. looking at a late crop due to planting delays, there remains a great deal of uncertainty with this year’s crop.
In search of a positive in last week’s market activity, it appears the selloff was due more to the weakness in old crop July futures more so than new crop as existing fundamentals are supportive of current prices. Believing these are more likely to strengthen over the next few months, we feel new crop prices will rebound.