The market’s assault on December’s contract high of 89.28 continued last week with 90-cent cotton now squarely in the crosshairs. Support came by way of data confirming tighter cotton supplies and a growing economy poised to fuel demand. Trading within 75 points of the previous high, December futures closed Friday at 87.92 for a gain of nearly seven cents since mid-May.
Lending additional support is supply side uncertainty. Current weather woes across all production regions are likely to reduce planted acres from that already lost to grains.
Weekly export sales of 112,000 bales of current crop and 21,000 bales of new crop when combined reflected a decline of 53 percent from the previous week and 36 percent off the four-week average. Though hoping for better, we take some comfort in knowing sale commitments have already surpassed 17 million bales thereby leaving very little cotton available to purchase.
More significant was a decline in shipments with 282,500 bales exported. In the eight remaining weeks of the marketing year, shipments need to average 303,000 bales a week to meet the newly revised export estimate.
The most anticipated news of the week was USDA’s supply/demand estimates for the month of June. Though always fearful of disappointment, Thursday’s figures were in line with industry expectations. You have all probably seen the numbers so I will touch on those most pertinent to the market.
As for current crop (2020), in keeping with the trend of increasing demand, both U.S. and global ending stocks were reduced. As of July 31, domestic ending stocks are projected to fall to 3.1 million bales and globally to 93.5 million. This was accomplished in the U.S. by raising exports to 16.4 million bales, a 16 year high.
As for new crop (2021), ending stocks were further reduced. They are estimated to fall to 2.9 million in the U.S. and world stocks will drop to 89.3 million by July of 2022. This apparent shrinking of inventories is the driver behind the current market advance. U.S. production of 17 million bales went unchanged awaiting a more accurate accounting of planted acres.
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Even so, this, or even a slightly larger crop shouldn’t be viewed as bearish considering several hundred thousand bales could be shipped following the close of the marketing season through the months leading up to harvest. If so, the estimated 3.1 million bale ending stocks could possibly be as few as two million before new crop cotton has time to enter the pipeline this fall.
In other economic news released last week, consumer prices rose five percent in May versus a year ago. This is the biggest surge in inflation since August 2008. The core index alone, which excludes food and energy, rose 3.8 percent while vehicle sales jumped 7.3 percent accounting for one-third of the overall rise in the CPI.
We all knew it was inevitable given the escalating costs of transportation, commodities, and labor brought about by the renewed demands of a healing economy. It is debatable whether this pattern will continue or be short lived the outcome of which will influence the Fed’s future monetary policy.
One should note this number is boosted somewhat when compared to last May when prices plummeted as demand collapsed at the onset of Covid. Putting aside this outlier year and comparing today’s prices to those of May 2019, the CPI becomes a more manageable 2.5 percent. Still, given the degree of consumer pent up demand, do not expect inflation fears to curb buying, at least not in the short term.
Where to from here? There is no doubt demand is real and the U.S. is poised to be the major supplier. As always, price will ration demand at some point. At present, staring at a shorter crop and dwindling inventories that somewhere may very well be beyond 90 cents.
Despite this bullishness, we urge anyone who has yet to price any new crop cotton to do so at these levels. Others should consider their risk tolerance and how it fits into their scale up pricing strategy.