Cotton’s Latest Price Rally Appears to Be Over
April 6, 2024 What can we say? Cotton took a combination of punches directly on the chin all week, and the punches have been rather consistent for the past month.
While not all the momentum of the February price rally has been lost, the market has been little more than a punching bag for the bears over the past five weeks. The rally generated a price high of 101.50 and, after five consecutive weeks of lower closes, the May contract settled the week at 86.25.
It is done.
July will try to rally back to 88 cents with a weak chance to trade the 90-cent level again. However, I doubt its success. The July contract is set to become the spot market contract as May begins it expiry period on April 24. Open interest reached a 2 1/2 year high early in the week but began its expected decline as prices collapsed. Too, the continued build up in certificated stocks spelled doom for the May contract.
The new crop December contract has been extremely stable the past six weeks, trading a very tight 125- to-175-point range, generally from 83.50 to 84.50 cents. The May and July contracts declined some 900–1000 points during the past six-week period. December experienced a decline of only 50 points and settled the week at the low end of the range at 82.65 cents. New crop prices will challenge the 85-cent level again.
U.S. carryover remains in the historical low range and will likely slide further in the April 11 USDA world supply demand report. The current estimate is 2.5 million bales and is expected to fall 100,000-200,000 bales. U.S. exports were active late in the week as prices fell, but Brazilian and African recaps continued to captivate the market.
The USDA weekly export sale report was good, not great, but U.S. shipments did jump to 367,600 bales – an extremely healthy level that increases the odds that USDA’s export estimate for the current season of 12.3 million bales will be met. On a positive note, if the current shipment pace can be extended, U.S. exports could climb to 12.5 million bales, lowering carryover to a new crop price-friendly estimate of 2.3 million bales.
Certainly, this week’s price drop below 87 cents did generate current sales, but nothing big. China will continue to buy U.S. – as they have all season – with no end in sight just yet. However, their purchases will tend to be only moderate until more is known about 2024 growing conditions. Nevertheless, they still need to boost their level of reserve stocks.
Other important fundamentals working in favor of the bears include the long-standing demand deterioration for cotton specifically, but also the fact that Brazilian cotton has captured a significant share of the world export market which until the past 15 years was the sole province of the U.S cotton grower. The combination of both the Brazilian and Australian cotton industries have simply out promoted the U.S., and those growths are now favored more in world trade.
Thus, the U.S. is on the verge of losing its comparative advantage in world cotton production. U.S. textile manufacturing is all but nonexistent. The U.S. has fallen from the world’s largest producer of cotton to now the fourth largest. Too, Brazil is on the verge of becoming the world’s largest exporter. All of this has happened during the past generation. Certainly, the U.S. industry is set for a self-examination.
Market prices fell to the very bottom of our 87-95 cent trading range in the week and the top of the range is lowered to 88-90 cents. The price drop should be halted at this level. Nevertheless, neither the U.S. consumer nor the world consumer has shown any indication of returning to the apparel market.
The U.S. and world battle against inflation has been met strong headwinds, and inflation is winning. Thus, it will continue to be a very sharp thorn in the side of cotton demand. Generally, an increase in demand would be necessary for the December contract to approach the 90-cent mark. However, given the tightness in U.S. and world stocks, the New York December contract can approach the 90-cent level if the Texas production districts of 1-N and 1-S fail to receive adequate moisture between now and June.
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