Thompson on Cotton: Volatile, Sideways Trade Expected for Near Future

    Clean young cotton field in the Lower Rio Grande Valley. Photo by Danielle Sekula Ortiz.

    Last week began where the previous one left off as December futures rebounded to an intraday high at 124.24 before closing Monday at 123.47 for a gain of a penny. Unfortunately, traders were not so friendly for the remainder of the week as new crop prices fell 332 points to close Friday at 119.16.

    Keep in mind, when a market is overbought any negative news tends to be amplified so such a drop wasn’t unexpected. On Tuesday with predictions of greater rain chances for the Southwest, traders saw this as a reason to bail causing December futures to fall 250 points.

    Also, with most all on call sales rolled to July, mills took a breather from fixing cotton. So, the market was absent buying liquidity from previous trade short covering which has propelled prices for the past several months.

    Look for the market to trade sideways, albeit in a wide range, over the next few weeks as mills have a couple of months before the six million bales of on call sales must be fixed. This is a large volume when you consider on call sales last year at this time were only three million and a meager 1.7 million bales two years ago.

    The question becomes will specs let the mills off the hook by stepping out of their way by selling the market? Or, will they stand their ground knowing that further rolling by the mills is out of the question and time is on their side?

    With traders closely watching planting conditions in the Southwest, the improved rain chances from early last week were quickly rescinded. In fact, moisture conditions are so dire some are comparing it to the Dust Bowl era. Since January 1, Lubbock airport has received 0.38 inches of rain when the ten-year average is 3.19 inches.

    Making the situation worse, snow fall last year was 2.7 inches compared to an average of seven inches. Not to mention the current drought conditions are intensified by the lack of subsoil moisture.

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    Where to from here? Expect a great deal of volatility for the next couple of months as the market reacts to the news of the day. Case in point, while writing this review I just got word the Rolling Plains of Texas received two to six inches of rain over the weekend. Do not be surprised to see the market begin the week selling off on such news.

    However, with the market weighing the positives of a large volume of on call sales and unfavorable soil conditions in the southwest versus an inevitable decline in demand, there appears to be support from the 1.15 to 1.20 level. However, market rallies cannot be sustained on supply issues alone, especially those with a current life span of over two years.

    Instead, it must be based on growing demand. World consumption of a record 124 million bales is not likely in the face of inflation and a probable recession. Adding to demand pressure, a third of China’s population, a number that exceeds the entire U.S. population, is currently locked out of work due to Covid and have been for weeks.

    The severe trickledown effect this will have on the overall world economy will certainly decrease the demand for cotton fiber in time. Thus, being risk adverse, look at current price levels as a good pricing opportunity.

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