Finally, a little trading based on cotton fundamentals. Solid triple digit gains of 300 to 400 points were a welcome sight. Even the new crop 2022 and the red December 2023 made solid gains. December 2023 traded up to 84.25. Cotton supplies, at least into May 2023 are in question. It’s too early to hang our hat on weather.
However, even absent the drought, the market is asking the question, “Will there be enough cotton will be available in 2022.” Yet, both the war rhetoric and tragedy have heaped uncertainty on cotton trading more so than on other commodities as more direct fundamental impacts were visible in other commodities.
The cotton market has battled through one of its natural price consolidation phases and has come forward with a firmer, hopefully less volatile outlook. Once again supply and demand do matter and are the principal price determinates, just as Adam Smith told us in 1776 in the publication of his “The Wealth of Nations.” Incidentally, his publication was but one of the three great events that year.
The bulls grew tired of grazing and talk of being slaughtered and came back to the ring at week’s end. The old crop once again set its sights on 125 cents, potentially buoyed by on-call sales and a potential run to 130 cents remains. The new crop December continues to clearly point to the potential of questionable supplies and the lack of enough quality cotton.
A December run to 107-112 cents is now visible. The December 2022 contract, facing the impact of a drought in the important Texas-Oklahoma region could project into the 120’s, but that’s a little high. Yet, any marketing strategy I might conjure up would have one fully priced before such a rally matured.
USDA’s March supply demand report, released this week, confirmed the tightening supply of world cotton as world carryover was reduced 1.74 million bales, down to 82.57 million bales. World consumption was estimated to exceed world production during the 2021-2022 marketing year by 4.8 million bales.
In its report, USDA reduced world production to 119.85 million bales, down 300,000 bales from its February estimate. World consumption was increased to 124.5 million bales, up 100,000 from the prior month. World consumption has demonstrated a consistent pattern of growth throughout the year.
More on Cotton
The strength in demand, coupled with a somewhat smaller than expected crop has supported prices all year. The strength in prices is expected to continue. The major change in the March report included smaller Indian production, down 500,000 bales from the February estimate. The report was viewed as bullish.
Cotton prices have struggled since the beginning of Russia’s invasion of Ukraine, as expected. However, the ongoing tightness in world supply has jolted the market back to the reality of the imbalance in the cotton supply and demand. Additionally, and more importantly, the war’s impact on cotton production has been to propel energy costs to the forefront of the cost of producing cotton.
The cost of fertilizer, irrigation, fuel, and various chemical inputs have increased from 50% to 300% depending on the individual item. However, with fertilizer costs up 250% to 300%, production costs will effectively double from 2021. A crop that cost $800 per acre to plant in 2021 will approach $1600 this year.
Some growers in Arizona and California, may see production costs increase to $3,000 an acre—effectively eliminating cotton production as an alternative. A three bale per acre yield has now rendered the decision to plant cotton very iffy. Many growers essentially cannot expect a profit unless they can produce almost four bales per acre.
Production concerns have surfaced, and this has worked to take December near the 105-cent level and pushed cotton back to its prior trend line. The market ended its weekly trading session with all contracts trading in the upper half of their respective daily ranges, and some even trading near the weekly highs.
The market can still hang its hat on the on-call sales versus the on-call purchases ratio. Despite the prior week’s price weakness, the ratio of cotton futures needing to be purchased over the next 90 days (9,338,000 bales) is nearly eight time greater than the futures contracts that need to be sold. Growers have been given a second chance to price cotton at a favorable level. Markets are very good at giving second chances, but not third chances.