Cleveland: Supply Now Driving Cotton Price Revival
August 5, 2022 As Joe Tex sang it, “Hold on to What You’ve Got!” Still, just a little more patience.
Cotton prices settled the week with another run at the 97-to-98-cent resistance level. The market continues to batter the 98-cent door. A few more times and the dollar mark will be behind us.
The supply side of the market is the force for higher prices. Demand, previously slowed by inflationary and recessionary fears, has stabilized for now. The big box stores and other retailers have cut back on orders. Further cuts are not in the picture unless the recession deepens. Mills are expecting orders will continue at the current level. Current demand, while not the basis for a bull market, will not hinder higher prices. The drought across the U.S. Southwest, as well as production setbacks in other countries, are the moving force.
The weekly settlement – 96.13 cents – was square in the middle of the nearby resistance zone 95.60-97.50, giving cotton an optimistic outlook.
Market activity remains slow and deliberate. Daily volume has ranged from 12,000 to 23,000 contracts for the past two weeks. The tendency has been for higher prices as sellers are waiting the outcome of the U.S. crop estimate. Merchants do not want to overbook mill sales. There are no natural sellers in the market.
Conversely, mills have been slow to purchase, as most of the first quarter needs have been met and they are judging demand levels before booking any volume for the second quarter. The market is waiting for the crop estimate.
The August estimate will be the first objective field estimate of the year. It will be released at 11:00 am Central time on August 12. The Cotton Market Roundtable group will discuss the report at 1:30 pm Central. To listen or participate, call 605-313-5148 and, when prompted, enter code 571052#. An archived recording will be available at the Ag Market Network website and on their Facebook and Twitter pages.
Analysts expect the report to lower both U.S. and world cotton production for the 2022-23 season by some 2.0 million bales, down from the July estimate of 120 million bales, to 118 million. The resulting world carryover level is expected to be reduced by a like amount, down to 82.25 million bales. U.S. carryover is currently estimated at 2.5 million bales. A smaller U.S. crop will generate both a reduction in exports and carryover – likely an equal reduction in each respective category.
U.S. carryover is already judged to be very low. Analysts are expecting the new estimate for carryover stocks to fall to 1.9 million bales, approaching a historical low. It is this low level of carryover stocks that is highly supportive of prices and offers the market the opportunity to again trade above the dollar level.
Drought conditions continue to worsen across much of the U.S. Most of the U.S. Southeast (Eastern crop) has received very adequate moisture. Too, most of the Mid-South (Delta crop) has had good moisture as well, but there are many more dry pockets than in the Southeast. The Southwest drought continues to spread and to deepen, if even possible. It is simply that bad.
It is this scenario that has many analysts suggesting the U.S. crop will fall below 14 million bales. It is a bit early for USDA to reduce the crop below 14 million, but the crop is shrinking.
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