Thompson on Cotton: Outside Influences Responsible for Recent Volatility

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After advancing seven cents in the past few weeks, expectations were high for this to continue given such strong fundamentals. However, as we’ve often cautioned, it is the unforeseen developments outside of cotton one must be conscious of for these can take the market by surprise. Such was the case last week when the Chinese State Council took manipulative actions to curb escalating commodity prices.

Yes, this is the same country whose imposed trade tariffs took prices down from the 90’s in 2018, not to mention was the origin of a deadly virus which decimated world economies. Thus, their actions were not a total surprise but rather their timing. Nevertheless, all commodities tumbled in heavy trading.

In a move so like them, it was announced various metals would be released from their national reserves to quelch demand. Furthermore, a crackdown on speculative trading by their domestic commodity traders led to forced liquidations of overseas and domestic long futures positions.

Here at home, the markets were further spooked as a bit of nervousness was detected amongst the Fed concerning the growing rate of inflation. Previously, they were adamant in saying interest rates would remain unchanged at least through 2023 as signs of rising inflation were temporary.

With our domestic economy projected to grow this year by seven percent, the fastest pace since 1984, its likely inflation will climb to 3.4 percent. Thus, the Fed last week stated they were prepared to tap the brakes on the economy by raising interest rates prior to the end of 2023 if necessary. As expected, the U.S. dollar surged on such news applying further pressure to commodity prices.

Despite all this negativity, cotton faired better than most other commodities. Resembling Rocky Balboa in a title fight, it withstood punch after punch while bloodied and on wobbly knees and survived the round making it to the corner to fight again. After trading nearly limit down on Monday, it spent the week in a wide trading range of 87.75 to 83.18.

Down over four and a half cents at one point during the week, it bounced back Friday to close at 85.18, recapturing a significant portion of these losses. Barring a dead cat bounce, we see this as positive given such bullish fundamentals.

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Export sales were much improved from the week prior. Current crop sales of over 113,000 bales when combined with new crop sales totaled 216,500 bales, 62 percent higher than last week. Shipments of almost 316,000 bales remains on pace to meet the new export estimate. Keep in mind also, these sales were made when the market was trading in the high 80’s.

Pakistan continued to be the major buyer although 15 other countries were in the market. Of note, with seven weeks remaining in the marketing year, 14.2 million bales have been shipped as compared to 12.7 million a year ago.

The southwest has settled into a more normal weather pattern allowing the remainder of the crop to get planted. In other areas back east, it is a mixed bag with the midsouth receiving excessive rains and the southeast dealing with a late crop. Though yields will still be in question, more will be known when planted acres are announced in a few weeks.

In any event, it is a good bet U.S. production will fall short of the 17 million bales currently projected.

Where to from here? Support at 83 cents appears firm as demand ratchets up every time its approached. However, just as formidable is resistance at 88 cents as repeated attempts to break through have been thwarted. At the sake of sounding like a broken record, look for this trading range to stay intact until we get a better handle on the crop. But as last week has taught us, keep a wary eye out for any possible black swan.

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