Cotton Prices Up on Acreage Report, But Demand Remains Elusive
July 2, 2023 The market went into USDA’s June Planted Acres report on a 197-point, two-day rally. It jumped nearly 160 points higher on the heels of the June 30 report but settled the day 134 points higher. The three-day gain was 331 points and settled the week at 80.37 cents.
Planted acreage for 2023 was estimated at 11.1 million acres, down from the March intentions report of 11.3 million. The higher weekly close ended a two-week skid in prices that had seen the market trade down to 78 cents. USDA adjusts planting estimates in August, but changes tend to be minor. My estimate of plantings was 10.8 million acres, yet I do not feel the revised estimate will be below 10.9 million acres.
Lower plantings in the U.S., India, and China – the world’s three largest producers – will keep the bull on the lookout for higher prices. However, to restate my long-held conviction, demand remains absent from the market. The supply side of the price equation is the driving force in price determination. Thus, price gains will be limited.
Demand markets are the source of sustained higher prices, not supply markets. Yet, it is the demand side of the price equation that has limited a price movement above the 83-84 cent level in recent trading. Additionally, one should expect the market to remain range bound, trading predominantly between 78 and 83 cents. The wider range remains the 75 to 88 cent area, but activity at the extremes is not expected until August-September, if at all. Too, it is likely good demand will not surface until at least March 2024, if then.
Either the U.S. economy or that of other major countries must show promise before cotton demand will be uncovered. To date, the U.S. economy is mired in escalating interest rates, ongoing inflation, and poor to declining productivity. In a word, demand is puny.
Forward sales to China a year ago were over two million bales. Today, forward sales to China are just over 200,000 bales. Yes, both Chinese and Indian production will be lower in 2023. However, U.S. production could be some 2.5 million bales larger. The U.S. would welcome that production in a market driven by demand. The U.S. is the world’s primary supplier of cotton. But in times of limited demand, increasing carryover stocks weigh heavily on prices.
Of course, Mother Nature will make the final decision on U.S. and world production.
Currently, the U.S. crop is off to a normal beginning, although there have been numerous hurdles along the way. Certainly, the vast Southwest dryland acreage needs moisture, and such is forecast for the current week. Should that moisture not materialize, the price resistance at 83 cents could be challenged. Crops in other regions of the Cotton Belt are beginning to show excellent progress.
Again, a 17 million bale crop continues to be in the forecast. Understandably some suggest a crop this large is in question. However, U.S. seed varieties have demonstrated an exceptional ability to withstand crop development difficulties and deliver record to near record yields.
In the absence of demand, the market must look to crop development news to determine price activity news. China has purchased 3.9 million bales during the 2022-23 marketing year, of which 2.6 million bales have been shipped. It is the remaining 1.3 million bales will be shipped in the coming months. Bust has noted their buying for 2023-24 has slowed considerably. Pakistan is the second largest buyer this season, purchasing 2.1 million bales, of which 1.6 million have been shipped.
Look for the narrow five-cent trading range – 78 to 83 cents – to persist.
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