Thompson on Cotton: Uncertainties Could Lead to Possible Rally Strength

Herbicide application in cotton. ©Debra L Ferguson Stock Photography

Monitoring last week’s market activity was much like watching paint dry. Trading in a range from high to low of only 141 points, December futures closed Friday at 83.32 for a small gain of 10 points. To best illustrate, the current market resembles a tired mountain climber clinging to a rocky ledge at 8300 feet desperately in need of energy to pull itself up or risk a precipitous fall. Where might this energy be found?

Today’s crop conditions report will likely show the U.S. crop is nearly ¾ planted. It also will give us our first look at actual crop conditions. Rainfall continues in the Southwest while significant rains swept through the Southeast this past weekend which were sorely needed. Though planting is not yet complete, the crop is getting off to a much better start than once expected. Nevertheless, the all-important question remains how any acres will ultimately be planted to cotton. The answer to which will we soon know.

Any indication of strengthening demand would lend a very helpful hand to our climber. Last week’s exports appeared to do just that as combined current and new crop sales totaled over 276,000 bales, a 100 percent increase from the previous week and its highest level since April 1 of this year. China returned as the primary buyer followed by Pakistan and Vietnam while 16 other countries made purchases, as well.

In addition, shipments of over 300,000 bales keeps us easily on track to meet the USDA export estimate with only 10 weeks remaining in the current marketing year. Even so, apparently it will take more as the market barely reacted to these positive numbers.

On the home front, consumer spending in April rose by 0.5 percent over the prior month due in large part to increased vaccinations, fewer business restrictions, and ample savings, a trend likely to continue which should bode well for apparel sales.

The only fly in the ointment is higher inflation predicated by consumer prices rising 0.6 percent from a month earlier while up 3.6 percent versus a year ago. It is hoped as labor shortages and supply chain disruptions are corrected inflation can be maintained at manageable levels shy of requiring measures which might hinder economic growth.

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Another boost to our mountain climber could come from the spec community. Last week’s Commitment of Traders report showed they further reduced their net long position by slightly over a million bales. However, upon closer inspection, most of the selling was in July futures while at the same time they added 100,000 bales to their new crop long position. Their overall net long position now stands at 3.6 million bales, which is very near the four-year average of 3.4 million.

This is their smallest net long position since August 4, 2020, when it was at 3.1 million bales. At that time, it was rebounding from a June 2020 extreme net short position on the way to this past February’s peak net long. The difference between now and then is the trade’s net short position. Currently they are short 12.4 million bales while in August 2020 their short position was less than one million. This hefty position held by the trade will provide a level of market support even if the specs continue to liquidate.

Where to from here? To put it simply, have patience. We have been preaching this for weeks, but it still holds true. There are too many unanswered questions about the crop and the demand for it, which will be answered over the coming weeks. Given firm market support at current levels, see it as an opportunity to wait on a possible two or three cent rally before pricing more of your crop.

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