Thompson on Cotton: New Highs Renew Life of Bull Market

    Cotton harvest. ©Debra L Ferguson

    Climb the fence because the bull is loose again! Both the March and December contracts reached new trading and settlement highs last week. Current crop futures traded up to 119.90 before closing at 119.70. In similar fashion, new crop futures climbed to 97.25 before settling at 96.83.

    Since this bull run began six weeks ago, current crop prices have advanced 16 cents while new crop is up over nine cents. As previously mentioned, a bull must be fed daily at these lofty levels. Last week’s triple digit gains of 452 and 225 points, respectively, was largely due to a good helping of positive fodder.

    So often feared, USDA’s monthly Supply/Demand report released Wednesday contained a host of market friendly surprises. Most notable was a reduction in the U.S. crop. Previously projected to be 18.2 million bales, it was revised downward to 17.62 million with a shorter than expected Texas crop as the primary reason. This, coupled with a slight increase in domestic mill use, more than offset an expected decline in exports.

    Globally, though Chinese imports were reduced to 9.75 million bales versus the 12.8 million of last year, total world mill use is estimated to be 124.24 million bales, the highest level in 14 years. This illustrates the growing trend of textile sourcing moving from China to Pakistan, India, and the Western Hemisphere. As a result of this increased demand, global ending stocks are estimated to fall to 84.4 million bales at the end of the 2021 marketing year from beginning stocks of 97.3 million.

    It’s further projected that at the completion of the 2022 market year world ending stocks will fall even further to 85 million bales. This is the major reason for prices being where they are today and creating an air optimism for new crop.

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    Last week’s export report reflected such demand as combined sales of current and new crop totaled 441,600 bales with 19 different countries buying. Current sales commitments of 11.7 million bales are approaching last year’s number, shy by only a half a million. Shipments are still disappointing, though 177,000 bales sent abroad last week was an improvement, it remains a far cry from the weekly average of 383,000 needed. Nonetheless, encouraged by the absence of sales cancellations, we are confident demand driven sales will at some point get in the hands of buyers.

    Not to discount the favorable news of last week and its influence on prices, we must be attentive to some possible threats. Aside from the unknown, the greatest of these is the Omicron variant’s impact on the world economy. Its rapid spread is just now being seen in China and the Far East where tolerance policies are much stricter.

    As a result, a total shutdown of several major manufacturing cities and ports has been imposed affecting over three million citizens, a scale unseen in two years. In what will most certainly be a trickledown effect, supply chains could be dealt another serious blow. We can only hope this will be short lived as its impact in the U.S and Europe have shown to be.

    Where to from here? The posting of new highs has given renewed life to a bull market. Encouraged by strong fundamentals, spec buying and trade short covering should push prices even higher with over 12 million bales of on call sales providing firm support and minimizing the risk of a major correction.




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