Cleveland on Cotton: “The Bull Is Still in the Fattening Process”

    Photo: Kay Ledbetter, Texas AgriLife Extension

    The big bull is raging, bellowing, stomping, and begging to be fed. He has furiously charged higher the past three weeks crashing through all overhead price resistance and sailing above price targets. It’s a worldwide phenomenon. India is experiencing record high cotton prices; Chinese prices have moved higher and higher. The same with Brazil.

    Speculators returned to the cotton market in force at the same time mills began to activate on-call fixations and for the third consecutive Friday prices traded triple digits higher and experienced limit up trading. On-call sales fixations caught a market void of sellers, and coupled with speculative buyers, the market was overwhelmed, leaving prices to charge higher.

    All contracts established record high closes on the week and essentially established three consecutive days of record high closes. The price trend continues to point upward and in this case is almost pointing straight up, due north. Certainly, that cannot be sustained, and a major correction is due.

    Yet, a correction does not portend to relieve the “dollar plus” scenario for cotton. Dollar cotton will continue through the 2021-22 old crop contracts and be maintained in the new crop 2022-23 contracts. Hopefully, the astute U.S. grower has not missed that 2023 December contract, or red Dec as the market lingo calls it (or even pink Dec), is trading above 87 cents. Certainly, we know many an international grower has asked about that price.

    Based on the existence of the price gap in the 127-128 cent range, the May contract now projects to 140 cents. From there, up to 148 cents is in play. December has all but recached its 112-cent target, and the next objective is 119-125 cents. Yet, there are some suggestions that prices need to back off. Yet, Texas and Oklahoma are parched.

    The very bullish on-call sales versus on-call purchases have made their mark on the market and carried prices beyond expectations—and some have doubted the importance of this very historical fundamental. Some, including the cotton merchant community, have even worked overtime to hide this market indicator from the cotton grower.

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    Unfortunately, textile mills were caught far too short in a market that had strong demand. Market prices ran away from mill fixations as mills just incorrectly kept “betting on the come.” They lost, and they lost big. The on-call sales versus on-call purchases ratio, when as wide as it has been in 2022 has always proven to be an excellent indicator of prices moves.

    Some have questioned its value because, as they say, the use of options distorts the ratio and the fact that many international growths are now traded. Actually, those factors make the use of the ratio a powerful fundamental tool that is much more appealing, truly not less important. The existing ratio, now 8.2 to 1 is at its highest level of the season, but other factors are beginning to override its predictive power as the marketing season wears thin.

    At such high price levels, “price gaps” are beginning to appear in the charts. It’s a sign of the times, so to speak. Presently, market participants, for the most part, are speculators or traders in a bit of trouble. Thus, prices are running off the charts, pun intended. Wild market swings are inevitable. Fundamentals have run their course. They have delivered a market closer to 150 cents than to 100 cents. Price discovery has been accomplished.

    Prices have a bit more room to run higher, that is, mills do need make more fixations. Additionally, the 2022 crop is facing a potential weather disaster. Either of those will take prices higher. The market is likely to get a dose of both.

    However, this week was the first sign of mills beginning to “loudly” complain of being unable to pass along the rising price of cotton. Yarn mills are being squeezed and typically that is the first sign of trouble, price trouble. Mills are openly suggesting they are ready to consider that they need to think in terms of changing their fiber mix.

    They will ride the current mix for a month, or two months, or even three/four months, but their lead time from buying cotton to selling yarn is extremely short. In their minds it is even shorter if yarn inventory is building, and profits are disappearing.

    Retailers continue to suggest their sales are solid, but they caution that instead of 15% sales growth, year over year, they are looking at only 6-8% sales growth for 2023. Yet, that is still a healthy level compared to pre coronavirus years. Too, consumers, especially the American consumer, has cash. Thus, neither a slowdown in cotton consumption nor a slowdown in consumer sales in on the nearby horizon. However, a potential inflation and energy-based price cash crunch is expected during 2023 and 2024.

    Cotton’s nearby outlook is bolstered by the excellent demand for U.S. cotton export sales and shipments. Most recent weekly shipments were the highest for the 2021-22 marking year. Too, we are now discovering that apparently merchants/cooperatives have under reported export shipments.

    U.S Department of Commerce data for cotton loaded on vessels is considerably larger than cotton shipment data collected from cotton merchants/cooperatives. Some one half million bales or more may have been shipped from the U.S than currently reported by USDA. It must be good to have two sets of books, one for the bulls and one for the bears.

    The bull is still in the fattening process and the impending planting problems facing most of the U.S. acreage cannot go unnoticed. One would correctly say, “Well, they always get enough rain to plant the crop.” Yes, they do, or they have. Yet, it should also be noted that soil conditions are drier, and the drought is more widespread than in any previous year. Something will give–it always does.

    Currently, December contract traders are betting on the drought. If so, December futures are undervalued. Prices this high are potentially forcing mills to look for alternatives.

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