Cleveland: Time to Keep an Eye on Cotton Supply
July 4, 2022 Cotton sailed through the week and ended about where it started – near 97 cents, basis December.
Grains and oilseeds traded in sympathy, but cotton has the more favorable economic fundamentals of the crop complex. The weekly trading range was near 600 points. The call for another nickel (500 points) is still on the agenda. A move to the 102-103 area remains the next objective for the December contract to conquer. Trading down to near 92 cents and up to 98 cents tells us the market is active and will remain so.
The market’s strong high close on Thursday (June 30), after the June plantings report, reminds us that market fundamentals do matter. The Friday (July 1) selloff simply let us know there is a lot of directionless trading in front of us. However, the path of least resistance for cotton price movement remains higher.
Yes, the rotten numbers reminding us of the desperate economic situation for both the U.S. and the world economies are a major backdrop for price movement and direction. World cotton demand will provide its important input into the direction of price movement, but a combination of U.S. and world cotton production will fill in the other part of the price equation.
As much as the worries of demand are, the stage is being set for supply to be the key price factor to keep the keener eye on. Specifically, world carryover stocks are somewhat low, thus the market will focus on the imbalance of new production versus textile mill usage in an attempt to gauge whether carryover stocks will increase or move lower. Likewise, U.S. stocks are unusually low, and production problems in the U.S. will be met by a combination of an even lower production, even lower carryover supplies, higher prices, and reduced exports.
The domino effect will be significant. Trading up to 102-103 cents will be met with significant price resistance, but confirmation of a U.S. crop smaller than 16 million bales will set up a strong, and likely successful, challenge of the 102-103 cent price resistance.
The 2023 December contract fell below 80 cents at week’s close and should be viewed as a significant pricing opportunity for world textile mills. Declining world carryover in the face of strong grain/oilseed prices is not a good omen for future cotton plantings. U.S. grower response to the prospect of 80-cent cotton would find 2023 plantings below 10 million acres, or at least more than 2.5-3.0 million acres below 2022 plantings.
Linking the December 2022 price and the December 2023 price is the ongoing drought in Texas, Oklahoma, and New Mexico. It is not brash to speak of weather, but it is not as speculative as might be typical. The current drought continues to spread. The area of extreme drought in the heart of the Texas cotton region continued to spread throughout June. The area is facing a crop that is literally being devastated. Texas is likely facing a 5.25 million bales crop, at the most – likely lower.
The 2022-23 carryover, currently estimated by USDA at 2.9 million bales, could fall to 1.9 to 2.3 million bales. Such a level would be viewed as a zero-level carryover as the pipeline never runs dry and, at the extreme, the market effectively prevents any selling of a cash commodity in such short supply.
USDA’s June planted acreage report varied from the March intentions report only by increased planting in Texas. Such was expected. However, as alluded to, the increased acreage in Texas will not be reflected by increased production. Estimated plantings were 12.5 million acres, up 11% from 2021 and up 2% from the March intentions report.
Exports shipments are on track to meet the USDA export estimate of 14.75 million bales. A raw calculation suggests average shipments for the remaining weeks of the marketing year (five more weeks of data) must be slightly over 400,000 bales weekly to make the USDA estimate. However, USDA’s shipment data is reconciled with actual census bale count data at the end of the marketing year. Historically, the USDA data is always (a strong word) reconciled higher. Thus, the USDA export estimate will undoubtably be met.
Look for the market to back and fill as it begins to move higher. The 102-103 cent area is critical but should be breached.
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