Is the Market Boosting or Killing the Cotton Crop?
July 24, 2023 The market is doing what it does best in the early growing season – killing the crop.
We noted last week that the crop was challenged in three of the world’s four largest cotton producing countries – India, China, and the United States. Lacking any positive demand news, the market, rightfully so, spent the week trading the supply side of the price equation. In the face of a 95-million bale world carryover projected for the 2023-24 marketing season, the only near term fundamental the market could discern was the weather problem…or the below average crop development situation facing most of the northern hemisphere crop.
In most years, it is typical for the market “to kill the crop” two or three times as various pre-plant and crop development issues face the crop. Added to this week’s concern was the saber rattling by Russia as it bombed the Ukrainian ports, sending grain markets higher with cotton trading in sympathy. Additionally, many of the publicly traded corporate giants reported excellent second quarter profits this week. This provided a period of good feeling to most all markets.
These events allowed the narrow 78-83 cent trading range to stretch its arms to the topside in an effort to test the 88-cent top end of the wider 76-89 cent trading range. Further crop deterioration could bring about a test of the 89-cent resistance. Yet, without improvement in demand, 89 cents becomes very top heavy. In fact, it will be surprising to see an 85-86 cent trade, but anything up to 89 cents is possible as is a trade below 80 cents. Yet, any continued problem with crop development will work to lift the 76-cent price support to the 78-80 cent price level. Too, we cannot disregard a five-cent rally over the past two weeks.
There is an increasing amount of bullishness in the cotton/commodity press. Once again, I hope my analysis proves to be incorrect and the bullishness is forthcoming. However, once again I am a naysayer. The current increase in cotton prices is a normal phenomenon and falls within the typical “back and fill” context of a typically active market. Granted, any read of fundamentals is at best difficult, give the current growing season, and coupled with the massive carryover stocks, the European recession, and cheap U.S. money policy.
Yes, 5% is cheap money to me. So many forget when 7%-8% were considered the norm and are borrowing and spending like interest rates will soon fall back to 2%-3%. Compounding the difficulty is that the U.S. consumer continues to drive the U.S. economy. Consumers have all but maxed out all lines of credit, yet spending continues unabated. Apparently, both through “let’s give away everything” fiscal policy and very loose monetary policy, policy makers pumped more money into the market than statistics bear out – i.e., cheap money is still readily available.
Inflation is still a major issue and will nix cotton price activity above 89 cents…if it even can get that high.
Add to that the Dow Jones has been up seven – count that, seven – days in a row. There is a lot of good feeling in the speculative world. Cotton, so often the absolute darling of the speculative world, is reeling them in once again. In fact, it is beginning to look as if the boat will not be big enough to hold them all. Speculators are back to driving this market, and that means higher prices until they step aside. Yet, the absence of demand is still the silent news behind the market.
The narrow five-cent trading range we were so proud of did ease up to 84-plus cents. The top of the wide range holds firm at 88-89 cents.
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