Thompson Cotton: Prices Rise Despite Improving Moisture in the Southwest

Cotton seedlings. ©Debra L Ferguson Stock Photography

In a holiday shortened week, cotton traded up each day to close Friday at 85.88 for a gain of over two and a half cents on the week. Ironically, this was all in the face of continued rainfall in the Southwest which appears to be breaking the drought in many areas. To best illustrate, below are rainfall totals for the month of May in various locations versus the same month a year ago.

These figures are quite impressive with the potential to produce a larger U.S. crop. However, the question of planted acres remains. The difficulty of getting a crop in under these extremely wet conditions just adds to the uncertainty of cotton acres lost to grains.

It will be interesting to see if the USDA attempts to answer this question in its monthly WASDE report on Thursday. This close to the report’s release, it is a good bet they will defer until June 30 when actual planted acres are stated.

Feeding our bullishness, last week’s advance was more of a response to strengthening demand than anything else. Keep in mind that history tells us demand is necessary to sustain a bull market. Fortunately for us, there are more and more indications that consumption is on the rise as we come out of Covid.

This increase in cotton consumption as old crop inventories are shrinking will further serve to tighten stocks. The accompanying chart from Jernigan Research shows offtake in May was twice that of previous months. Other examples of strengthening demand can be found in apparel sales being up 70 percent in the UK, the highest level since March 2020.

Here in the U.S., the National Retailers Federation is predicting Father’s Day sales of over $20 billion compared to $17.8 billion last year with apparel believed to be the second most popular gift behind holiday cards. We are told denim is seeing a revival in women’s apparel as they update their pre-Covid wardrobes.

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This is good news when you consider women’s wear accounts for over half of the global apparel market. Finally, the U.S., China, and Europe make up nearly 80 percent of world apparel sales. With these three countries economically leading the way out of Covid, expect demand for cotton to strengthen.

Last week’s export sales support these claims as combined old and new crop sales totaled almost 287,000 bales, the best week of sales since April 1. As a result, December futures traded as high as 86.85 after release of these numbers.

What to look for ahead? Over the past few weeks, we have seen sales increase every time December futures falls toward 83 cents. Thus, firm support still lies at this level. Look for new crop prices to trade in a narrow range until questions surrounding this crop are better answered.

This will begin with Thursday’s WASDE report, followed by the June 30 actual planting report, and, as always, weather news as the season is now earnestly underway. With that said, we tend to favor higher prices.

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