Another week has brought another contract high! For the third consecutive and eight of the last nine weeks, December futures set new intraday trading highs last week at 129.91. After surging ahead eight cents early in the week, the market fell toward the end of the week to 123.74 for a gain of 167 points. Despite the weak finish, it is the third consecutive week of settlement highs. Just when you thought prices had stalled, the bull charges once again. Looking back, new crop prices are up over eight cents for the month and twenty-one cents on the year.
Astoundingly, this is all being done as the stock market has its worst first quarter performance since 1939. Consumer prices are at their highest level in 40 years. The war in Ukraine and a resilient global pandemic continue to strangle supply chains. And adding to this long list is the Fed’s first significant interest rate hike in over 10 years, which is strengthening the Dollar and a likely precursor to an economic recession.
All these factors will at some point lead to the demise of our bull. The ultimate question becomes when, of which no one has an answer. If I did, this review would be coming to you from a tropical island as I lie in a hammock sipping a rum punch! Nevertheless, history would tell us we may be near since the highest a December contract has ever been is 135.50.
At present, on call sales of six million bales continue to provide firm market support. This has led to managed funds increasing their long position for the first time in four weeks. This combination, and the lack of sellers in the market, has been the catalyst for higher prices. Indicative of trade short covering being the driving force, Open Interest is declining while prices are rising. When those trade shorts are gone in four to six weeks, what the specs do in their absence will dictate the direction this market takes.
They will be looking to supply and demand for guidance. Planting is slightly above the five-year average pace with 16 percent of the U.S. crop now planted. Though the Southwest, notably the Rolling Plains, has recently received some scattered showers, it has done little to relieve the extreme drought conditions. That’s likely why the market was up 460 points the day after when normally just the hint of rain out there would drive prices limit down. It’s all but a given the U.S. crop will be shorter than estimated.
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As for demand, last week’s export sales and shipments were the highest they have been in four weeks. Doing so with prices hitting contract highs is very impressive. Additionally, sales cancellations were minimal at only 17,700 bales. Nonetheless, we view this as a ticking time bomb as the outside forces mentioned earlier will at some point erode demand. Some brands and retailers already report consumers are reverting to more conservative buying patterns.
Where to from here? For the next four to six weeks expect much of the same, potential new highs but extreme volatility. The May WASDE report will be released on Thursday. Traders will be watching it for cues since it will be the first to show crop and consumption numbers for the 2022-2023 marketing year. Considering all the bearish outside forces at work, it is highly likely cotton prices will be lower come harvest.
Over the past few months, the market has moved up incrementally taking its time going through milestone hurdles such as 1.10, 1.15, 1.20, and then 1.25. When the market tops, do not expect this same steady pace going down as it will be much quicker. Pricing cotton in such a scenario will be like trying to catch a falling knife. Always bear in mind, “the best cure for high prices is high prices.”