Thompson on Cotton: Prices Rally for 2nd Week

    Could it be a sign the winds of change are a blowing? For the second consecutive week, cotton prices closed higher. Advancing almost six cents last week, December futures settled at 96.74. To our good fortune, we’ve experienced a rally of over fourteen cents in just the past two weeks. More impressive, it was done within a backdrop of a souring economy, waning export sales, strained China relations, and renewed Covid lockdowns.

    The U.S economy continues to contract as seen by second quarter GDP falling at an annual rate of 0.9 percent. This followed the first quarter decline of 1.6 percent.

    By definition, a recession is two consecutive quarters of declining GDP. However, the Progressives in D.C. cite this is not the case since low unemployment and consumer spending serve to counteract. It is worth noting these are the same people who said inflation will be short lived as its only transitory.

    The latter does hold some merit as 372,000 jobs were added in June compared to the forecasted 250,000. In addition, consumer spending did rise one percent during this time as apparently consumers are still benefitting from improved household finances brought about by government stimulus money.

    Nevertheless, it’s becoming evident the negative effect of inflation is forcing changes in consumer spending patterns. Last week, Walmart executives lowered their profit outlook saying the rising cost of fuel and groceries were compelling consumers to spend more on necessities and less on products such as apparel and more on services and less on goods.

    Suffice it to say, as Walmart goes so goes the economy since it serves a clientele of varied incomes. In due course, consumer spending will depend on whether inflation begins to recede. Even though jobs are plentiful and unemployment is low most consumers are finding their cost of living rising faster than their incomes.

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    To combat these rising costs, the Federal Reserve once again raised interest rates three quarters of one percent. This is the first time in modern history such a sizeable rate increase has been made back-to-back.

    In post meeting comments, however, Fed Chairman Powell acknowledged the negative impact such increases could have on economic growth and suggested slower rate hikes in the months ahead. Both stock and commodity markets rallied on the news.

    Where to from here? We are beginning to hear more and more from mills of order cancellations by major retailers. This may have been a factor in last week’s declining export sales of only 56,670 bales though cancellations were minimal at 24,200 bales. On the supply side, looking at the conditions report, our U.S. crop continues to deteriorate.

    Thirty percent of it is now rated poor to very poor while that rated good to excellent fell to 38 percent. Managed funds, again, lowered their net long position by 1,366 contracts. Thus, last week’s rally was primarily a result of trade short covering. We should see fund liquidation start to ease having reduced their long position to such a low level.

    Also, the current volume of Open Interest is supportive of this, as well. With the recent rally comes improvement in the technical charts as the 20-day moving average was eclipsed last week and the 200 day is in sight at 103.21.

    We will keep a wary eye on demand, but, for now, technicals and a shorter crop tightening the balance sheet should be supportive. Look for the market to continue its assault on a dollar, but upon getting there, expect staunch resistance from the moving averages and grower selling.

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