By Jeff Thompson, Autauga Quality Cotton
May 16, 2022
And the beat goes on! Bolstered by a bullish WASDE report and on call sales fixations, both July and December futures posted gains for yet another week. July advanced 159 points to close at 145.20 while December futures fared better by climbing 425 points to close the week at 127.99.
As mentioned, USDA supply and demand numbers released Thursday were viewed as positive by traders bidding the market up nearly three hundred points on the news. This is the first time USDA provided 2022/23 estimates. U.S. production was lowered one million bales to 16.5 million as the drought situation in Texas is predicted to lower harvested acres to 9.1 million which would be one million acres less than was harvested in 2021.
Even with consumption at seventeen million bales, U.S. ending stocks in 2023 are projected to fall to 2.9 million bales versus 3.57 million last year. If so, it would be the lowest ending stocks since 2016/17. World production was increased 2.6 million bales while consumption was decreased by 954,000 bales from the 2021 crop. Even still, their world consumption remained a hefty 122 million bales. This demand side of the equation is what we disagree on as current macroeconomic headwinds will be a heavy burden to bear.
At present, there is a total disconnect between the cash market and New York futures. Mills cannot pass these lofty prices along to their customers any longer thus making polyester ever more competitive. A good indication of this was seen in last week’s exports sales where combined sales for both old crop and new were only 123,100 bales. A further weakening of demand is all but certain. The only reason July is trading where it is today and dragging December with it is the 5.5 million bales of cotton already purchased by mills but not yet priced. If the specs stay put and do not become sellers, these fixations will provide support albeit for a few short weeks.
The specs did decrease their net long position slightly last week which now stands at a little over seven million bales. However, this was minor profit taking and not anywhere near a change of sentiment. This could all change in a few weeks when these on call sales are gone. Obviously, we are in some trying economic times.
When have you seen both bonds and stocks tanking at the same time? This is certain to encourage a move to cash by traders seeking downside protection. Thus, when the on-call sales cover is gone, an exodus by the spec community would not be surprising.
After these on call sales are priced, the market will revert to trading on fundamentals. With every major world economy on the brink of a recession, the demand for cotton will surely decline. The sad truth is do not look for a quick fix. Past recessions have lasted an average of about 12 to 18 months.
However, never has one followed a global pandemic that turned the world upside down nor have they been on the heels of the largest government spending spree in recent history that has wrecked labor markets and inflated consumer prices.
Where to from here? Expect another four weeks of market volatility with market highs still possible. Beyond that, it becomes difficult to predict, but we believe demand destruction will more than offset the decline in production and subsequently these fundamentals will drive prices lower as we approach harvest. The prudent move going forward is to manage downside risk.